by Gary Alexander
June 18, 2024
In 1977, Congress created “dual mandates” for the Federal Reserve by amending the Federal Reserve Act to direct the Fed’s Open Market Committee to maintain the “growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.”
Putting aside for the moment the fact that the preceding sentence ends with three, not two, mandates, we must recall the context of 1977, which included high inflation and rising jobless rates, giving birth to the term “stagflation.” This flew in the face of the Phillips Curve, which purported to say that we either faced high inflation or high unemployment, but not both simultaneously. This new reality, in turn, gave rise to “the misery index,” which combined the jobless and inflation rates, which both reached double digits in the late 1970s, after this dual mandate was created. The misery index peaked at 22% in June of 1980.
The Fed’s target rates evolved to 2% inflation and 4% unemployment, netting a non-miserable 6% total.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
How is the current Fed doing? Let’s look at the latest iterations of their two major mandates:
Mandate #1: Jobs Rose 272,000 in May – That’s Great News, Right? (Sorry, No)
Here’s a case study in deceptive numbers. Gold bullion prices fell $100 per ounce early Friday morning, June 7, on the release of a “strong jobs report,” with a healthy 272,000 “non-farm payroll jobs” created in May, well above the projected numbers. According to weak-kneed gold ETF traders, a strong jobs report implies that the Fed will take longer to start cutting interest rates and “since gold doesn’t offer interest income,” higher rates for longer puts gold at a disadvantage. This reasoning flies against the fact that gold has often (1976-80, 2004-07 and during the latest rate increase, 2022-23) risen when interest rates have risen, but the ignorance of such traders runs even deeper. They often sell first, think second (if at all). If they would spend a few minutes to search out the details about the May jobs report, hardly any line item beyond the headline was positive:
- There are two job totals released each month. (1) The headline payroll total showed 272,000 jobs created, which everyone reported, but (2) the equally important household survey showed a 408,000 decline in workers last month. (The household survey tends to reflect workers in small businesses.)
- Part-time jobs grew by 286,000, while full-time workers fell by 625,000.
- Foreign-born workers grew by 414,000, while jobs for native-born Americans declined by 663,000.
- The civilian labor force shrank by 250,000 workers, netting a rise in the unemployment rate to 4.0%
The basic problem is that we think all jobs are equal, but that’s not the case. In the past year, more part-time jobs (1,511,000) were created than full-time jobs (1,163,000), and more government jobs were created in the last three years than in any three-year period in history. In private sector jobs, healthcare led the way, and they are often subsidized by Obamacare or Medicare, so why is this a “positive” jobs report?
In the post-pandemic world, real wages are shrinking, and the worker-to-population ratio has shrunk, too, netting far more part-time gig jobs counted as “payroll job growth” plus off-the-book work. In spite of a small post-pandemic pick-up, the male civilian labor force participation rate is still in a long-term decline.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Mandate #2: Inflation Is Finally Down – Right? (Sorry, Not for Most People)
Last Wednesday, the Labor Department announced that the Consumer Price Index (CPI) was unchanged in May, and the Producer Price Index (PPI) did even better, declining 0.2%. In the past 12 months, the PPI has risen 2.2%, with the core PPI rising 2.3% in the past 12 months, so the PPI is close to the Fed’s target.
Both mandates are near target range, yet Chairman Powell is not ready to take a victory lap, saying, “We’ll need to see more good data to bolster our confidence that inflation is moving sustainably toward 2%.” But at least inflation is moving in the right direction, depending on your perspective and wealth profile, right?
Rich folks are doing fine. Rising prices don’t hurt them, but for younger folks looking to buy a house, or living paycheck to paycheck, inflation is horrendous. Mortgage rates haven’t retreated, even when 10-year bonds drop in yield. Credit card debt and car loan rates have soared. Auto insurance is up 26% in the last year, and +51% in three years. Home ownership insurance is up 30%, as are property valuations for taxes.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The rising costs of servicing debts are huge, but they are not reflected in any cost of living or inflation index. Neither are higher taxes when inflation pushes you into a higher tax bracket. Part of this is included in owners’ equivalent rent, but that is just a down payment on the debt overhang of rising mortgage rates.
The Fed’s Hidden Mandate #3 – Financing Fiscal Follies
It’s time to touch the untouchable. The Fed’s “employment mandate” should be abandoned. They can’t make workers work. They can’t set wages or tax rates. And the inflation mandate is only controllable if they aren’t asked to finance the huge and growing deficits “mandated” by the political Parties in power. As for interest rates, the market (the bond vigilantes) set those. The Fed follows them, so forget that mandate.
Instead of the old dual mandate, perhaps the Fed should have only one mandate – their original mandate: Preserve the value of the dollar, and then supervise the banks on the side, but it cannot address the pesky third rail, Fiscal policy. The Fed is obligated to provide the liquidity Congress demands. Former Fed Chairmen Paul Volcker and Alan Greenspan directly or indirectly urged Congress to control their spending, but recent Fed chairs, notably Jerome Powell, have done the opposite, urging Congress to stimulate the economy during COVID, even after the economy revived quickly after the initial lockdown. As a result, we now see $2 trillion federal deficits per year, in times of peace and prosperity, unprecedented in history.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
In the 90 years since the birth of Franklin Roosevelt’s New Deal in 1933, total federal spending rose from just over $5 billion per year to $6.5 trillion, according to calculations by Joseph Bessette, Professor of Government and Ethics at Claremont Colleges. Adjusted for inflation, spending is 77 times higher than in 1933 and domestic spending is 125 times higher, while population grew just 2.5 times, so real per capita spending is up 30-fold overall and 50-fold in social spending. Bessette says, “No political development in the U.S. in the 20th century rivals in importance the growth of the massive social welfare state.”
Yet here we are in 2024 saying that we “haven’t done enough” for the poor, and there is a great divide of wealth. Alan Blinder, former Vice-Chairman of the Fed under Greenspan in the mid-1990s, wrote an Op-Ed in The Wall Street Journal (“Shore Up the Social Safety Net with Pre-distribution,” June 7), saying that the U.S. is rich enough to expand transfer payments, writing that “22.7% of U.S. gross domestic product is social spending, compared with 31.6% in France,” yet he fails to track the trajectory of these two nations.
In 1980, France’s GDP per capita ($12,739) was actually higher than America’s ($12,575). Today, France’s GDP per capita ($44,408) is barely half of America’s ($81,632). That’s because their generous welfare program combined with lax labor laws (like six weeks’ paid vacation), a high jobless rate and few children bankrupted their coffers. You need enough ambitious, hard workers to create big benefits for the masses.
As a result of this GDP gap, America’s social spending per person is now $19,000 vs. $15,000 per person in France and Germany. The magic formula is: You must create wealth before you can redistribute it.
Please remember these financial realities when you visit a voting booth near you this coming November.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
All content above represents the opinion of Gary Alexander of Navellier & Associates, Inc.
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A Look Ahead by Louis Navellier
Powell Needs to Face Reality – and Take Control
Income Mail by Bryan Perry
The Market Just Got Real Simple, Real Fast, For Most Investors
Growth Mail by Gary Alexander
The Data-Dependent Fed Relies on Deceptive Data to Meet its Misleading Mandates
Global Mail by Ivan Martchev
Beware the Franco-German Spread
Sector Spotlight by Jason Bodner
While in Europe, I Take a Closer Look at Travel & Leisure Stocks
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About The Author
Gary Alexander
SENIOR EDITOR
Gary Alexander has been Senior Writer at Navellier since 2009. He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks. For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.
Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s. He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division. Before that, he covered the economics beat for news magazines. All content of “Growth Mail” represents the opinion of Gary Alexander
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