Powell’s “unusual” remarks of Jackson reveal that he is framed by Trump’s prices and deportations, risking a style error from the 1970s, says the economist Slok

Powell noted that if the labor markets remain in balance, it is a “type of curious balance that results from a slowdown marked both from the supply and demand for workers”.

“This unusual situation suggests that rising risks for employment are increasing,” he added. “And if these risks materialize, they can do it quickly in the form of highly higher layoffs and increasing unemployment.”

Slok Customs Fortune In an interview immediately after the speech that this type of language was “confusing”.

“Understanding the word” curious “- I mean, it’s just a somewhat unusual expression,” said Slok.

The markets were delighted with the slight index that Powell gave that he would reduce interest rates at the next Fed meeting. However, Slok argued the signals of speech that Powell sees something deeper happening on the labor market: deportations and immigration repression distorts the offer of labor. And in his opinion, it could make inflation more difficult to tame.

An nourished origin through politics

Powell’s speech has put on the needle between two forces: slowing up a stubborn growth and inflation. On the one hand, he recognized a cooling labor market and an increase in the risk of recession, but on the other, he reported prices and a weakening of the dollar as new potential inflation engines.

Slok added that Powell clearly poses more weight on the slowdown of the labor market, but also left the door open to see what the August employment report will say.

“It was therefore a very two -handed speech, but which was still bowing to focus on the concerns that the labor market has slowed down,” said Slok.

But he added that Powell was frank on what could be wrong: prices and trade wars.

“It is also possible, however, that the upward pressure on prices of prices can stimulate a more sustainable dynamic of inflation, and it is a risk to assess and manage,” warned Powell in his prepared remarks.

Slok has said that the risk is real and that prices will have a “greater” impact on inflation that we have seen so far.

“If you are watching profits this season, we have had a number of companies, including Tesla, saying that the prices of their products are increasing,” said Slok. “So I think that it is justified, from the point of view of the Fed, to worry about the risk of increase for inflation.”

Deportations as inflationary shock

Slok went further, saying that Powell’s “type of balance” probably reflects the impact of mass deportations. The abolition of workers, he argued, increases wages in industries such as agriculture, construction and hospitality.

The aim of the administration is to withdraw 3,000 undocumented immigrants per day, or 1 million each year, noted Slok. This would of course be “of course” for the demand for labor, but also the supply of labor.

The result, he said, is inflationary pressure: “So, if you reduce the supply of labor, it is really the same impulse for the economy as the prices.

Slok warned that Powell could be sleepwalked in a classic “stop-go” trap.

In the 1970s, the Fed reduced interest rates too early after an initial inflation peak, to see prices again as oil shocks and undulating wages in the economy. This forced decision-makers to slam prices, based the United States in repeated recessions and damaging Fed’s credibility for years.

“The risk today is that we could see the same dynamic rehearsal,” said Slok. If inflation starts to climb up after a drop in rate, “the Fed will have to reverse the course – and in the worst case, start hiking.”

At the time, political pressure played a decisive role. President Richard Nixon strongly put pressure on the president of the Fed, Arthur Burns, to facilitate rates before the 1972 elections, a move of the blame historians to have triggered the second wave of inflation of the 1970s.

Today, President Donald Trump’s push for aggressive rate discounts and his trade war put Powell in a surprisingly similar constraint. Powell is forced to balance the political requests for more loose policy against the Fed’s double mandate to maintain prices stability and maximum employment.

The bottom line

Slok took care to note that Powell’s speeches are probably not writing with Trump. However, he admitted that political superposition is inevitable. With prices and deportations supplying inflation on one side, and a weakened economy firing in the other direction, the Powell choice set is shrinking.

“Prices and deportations lead to the same impact on the economy, namely higher inflation and slower GDP growth. And that’s exactly what consensus is waiting for the moment,” said Slok.

At Jackson Hole, Powell described this position as a “curious” balance. But for Slok, it looks more like a trap.