We got the November jobs report this morning.
For the better part of the past two years, this has been the spot to watch, as a condition for a Fed policy response: “cracks in the labor market” = rate cuts.
But even with a jump to 4.6% in the unemployment rate, the market’s reaction was muted.
Why? Because the Fed effectively front-ran this report last week.
Remember, Jerome Powell matter-of-factly revealed that the job growth reports are, and have been, overstating 60k (or so) jobs a month — not just in the annual revisions, but an ongoing “systematic overcount” (in his words).
He went on to say that inflation is in the low 2s, once you exclude what they now view as one-time price increases from tariffs.
These statements are an admission of a policy mistake. The Fed has been holding real rates unnecessarily high, while the labor market has been “cracking.”
This leads us to the second reason the market reaction was muted today: The Fed has already resumed the money printer.
They didn’t just restart pro-liquidity operations last week — just eleven days after ending a campaign of liquidity extraction — they did so in size ($46 billion in planned Treasury purchases over the next four weeks). And they did so with the explicit signal that they would pump liquidity into the system into perpetuity.
So, in typical Fed fashion, they pivot from a policy error, with no apologies.
That brings us back to my note last week, ahead of the Fed meeting. The Fed has been a headwind to growth, not only because inflation was sticking above their target, but because they believed economic growth, running above their view of the “new normal” (1.8% — their long-run projection) was inflationary.
On that note, we have another unapologetic admission of error from the Fed Chair last week. After spending the past two years barely talking about productivity, and reluctant to give credit to AI as a productivity driver, he said “we’re definitely seeing higher productivity,” and “it makes people who use it more productive.”
That matters because productivity is a key ingredient that can solve a lot of problems.
As we’ve discussed often in my daily notes, hot productivity gains promote wage growth, which is needed to reset wages to the increased level of prices (which restores quality of life).
And it can fuel wage growth without stoking inflation.
Jerome Powell himself argued this back in 2016 at the Peterson Institute (here): higher productivity growth is the driver of higher long-term potential growth.
So, they should not have been surprised by the current 3%+ GDP growth, and tame inflation.
That said, as we discussed last week, 3% real GDP growth is “average” in average times (5%-6% nominal growth). But it’s probably recession, in an economy that’s still digesting $7 trillion of money supply growth in five years (over 40% M2 growth).
We should be getting a much bigger bang for our buck. And now that the Fed is getting out of the way, we may finally get it.