Employment Report Disappoints but Probably Won’t Delay Federal Reserve’s Tapering Plan

The September employment report disappointed analysts; will it also complicate the Federal Reserve’s plan to begin withdrawing the monetary support that has cushioned the economy throughout the pandemic?

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Two major issues dominated the news in late July:  Inflation – whether it is,  is not a problem or is likely to be one; and the prospect that millions of renters would be evicted from their homes as a federal moratorium barring evictions for nonpayment of rent expired.

Starting with inflation, the old adage, “You can’t be a little bit pregnant,” comes to mind.  It’s becoming increasingly difficult to be “a little bit concerned” – or not concerned enough – about inflation.

Soaring consumer demand spurred by the recovery from the pandemic has collided with pandemic-related supply constraints, pushing prices for a wide range of goods and services steadily higher.  Consumer prices increased at an annual rate of 5.4 percent in June – the largest jump since August 2008. 

Pressure Points

Economists identify four different categories of price increases, creating varying degrees of inflationary risks:

  • Goods or services whose prices plummeted when the pandemic began but are now returning to pre-pandemic levels. Air fares and hotel prices are among the examples.
  • Areas in which prices have increased temporarily above their pre-pandemic levels – such as new and used cars, where prices have increased by 5.1 percent and 41.3 percent over the past two years. Analysts say the increase in used-car prices alone accounted for about one-third of June’s annual inflation rate.
  • Items with prices that are likely to remain above pre-pandemic levels. The restaurant industry, suffering from an acute labor shortage, is the poster-child for this category. The Labor Department reports that wages for leisure and hospitality workers increased by 7.1 percent year-over-year in June.
  • Sectors in which price increases have slowed during the pandemic – apartment rents loom large here, partly reflecting the impact of eviction bans, which have pretty much frozen the rental market. When the moratorium ends (see below) rent increases will almost certainly follow as landlords struggle recoup their pandemic losses.

Some analysts think most of these inflationary pressures will prove to be transitory; others see more fundamental trends at play and stronger arguments for the Fed to reverse its easy money policies in order to keep inflationary pressures in check. 

Fed Comfortable ─ For Now

Federal Reserve Chairman Jerome Powell has been firmly in the former category and his position hasn’t changed.  But his concern about the inflationary threat has increased. 

In recent testimony before the House Financial Services Committee, he acknowledged that inflation has increased “notably” and more rapidly than the Fed had anticipated and will likely “remain elevated in coming months before moderating.”   But most of the inflationary pressures are coming from “a small group” of goods and services related directly to the reopening of businesses that had been curtailed or shut down during the pandemic, Powell noted. For that reason, he said, the Fed remains confident that inflation will moderate later this year as temporary imbalances are corrected – confident, but wary.  Policy makers are prepared to act, Powell emphasized, if inflationary pressures don’t ease.  

“We are monitoring the situation very carefully, and we are committed to price stability,” the Fed chairman told lawmakers, adding, “if we were to see that inflation were remaining high and remaining materially higher above our target for a period of time — and that it was threatening to uproot inflation expectations and create a risk of a longer period of inflation — then we would absolutely change our policy as appropriate.”

The Fed classifies home purchases as investments and so doesn’t include housing costs in its inflationary calculations, but perhaps it should.  The housing market has sizzled throughout the pandemic and home prices continue to rise, despite scant inventories and growing affordability pressures pushing first-time buyers to the sidelines.  Fannie Mae has almost doubled its projected home price gain for this year from 8 percent to 14.8 percent. 

Although Fannie’s economists expect the appreciation rate to slow as housing inventories expand and buyer demand eases, they nonetheless predict that home price growth “will become one of the more persistent drivers of inflation … as other, more transitory factors diminish."

Another Moratorium Extension

On the eviction front:  The Centers for Disease Control (CDC) issued an emergency order extending until October 3 an eviction moratorium that has been in place for almost two years.  The CDC’s action came two days after the existing moratorium had expired at the end of July, and despite the Biden Administration’s initial assessment that it lacked the authority to keep the eviction ban in place.

"Whether [the extension] will pass constitutional measure with this administration, I can’t tell you. I don’t know," President Biden said. "There are a few scholars who say it will, and others who say it’s not likely to.”

The constitutional question arises from a U.S. Supreme Court decision upholding a one-month extension of the moratorium, which had been scheduled to expire at the end of June. In a concurring opinion, providing the decisive vote in that 5-4 decision, Supreme Court Justice Brett Kavanaugh said he agreed that the moratorium exceeded the CDC’s  legal authority.  He favored allowing it to stand, he said, only because its expiration was imminent. Any extension beyond July 31, he emphasized, would require Congressional action.

President Biden had pushed hard for a Congressional solution.  But when it became clear that Congress would not act before its August summer recess (and probably not at all), he decided to proceed with the CDC’s moratorium extension, notwithstanding the agency’s questionable legal authority to issue it.

The public health risks that would be created by mass evictions as the virus continues to spread justified keeping the moratorium in place, CDC Director Rochelle Walensky said.

“This moratorium is the right thing to do to keep people in their homes and out of congregate settings where COVID-19 spreads,” She noted.  “It is imperative that public health authorities act quickly to mitigate such an increase of evictions, which could increase the likelihood of new spikes in SARS-CoV-2 transmission. Such mass evictions and the attendant public health consequences would be very difficult to reverse.”

Buying Time

Even if the moratorium is eventually overturned, President Biden noted, the extension will buy time to overcome the administrative roadblocks that have delayed distribution of the more than $47 billion in emergency rental assistance Congress has appropriated. 

According to some estimates, 15 percent of the nation’s renters owe an average of $3,800 in back rent per household. The National Apartment Association, a trade group representing  residential landlords, says more than 10 million tenants owe its landlord members an aggregate  total of $27 billion in back rent.  Several landlord organizations have filed various suits challenging the federal moratorium and the moratoria that have been imposed separately by several states, including Massachusetts. 

Additional legal challenges loom. The coalition of real estate industry groups that challenged the CDC moratorium earlier this year, resulting in the Supreme Court decision keeping it in place through July, has filed suit to block the new CDC order extending the eviction ban through September. 

That coalition, led by the Alabama and Georgia chapters of the National Association of Realtors, said in an emergency filing that the CDC order is unlawful and was motivated by “nakedly political reasons ─ to ease the political pressure [on President Biden to help tenants], shift the blame to the courts for ending the moratorium, and use litigation delays to achieve a policy objective.”

This latest challenge will be heard by the same federal district court judge who heard the coalition’s previous challenge and sided with the industry trade groups in June, setting the stage for what is likely to be another Supreme Court decision on the issue.