Column-Fed scoreboard clouded by immigration uncertainty: Mike Dolan By Reuters

By Mike Dolan

LONDON (Reuters) – The Federal Reserve’s path forward seemed clear in September, but the picture is much murkier than many thought, and the past and future impact of immigration on the labor market is the hardest to see.

Less than a month ago, the Fed kicked off its easing campaign with a jumbo half-point interest rate cut, appearing confident that inflation was largely subdued and the red-hot labor market was cooling.

But a combination of wage gains falling short of forecasts last month, an unexpected drop in the unemployment rate and stiffer consumer prices apparently shifted the Fed’s rhetoric back into more expected territory.

Wednesday’s release of minutes from last month’s Fed meeting revealed much less certainty about prevailing economic conditions and the official data reflecting them than the statement issued on the day of the decision.

“Many participants,” the minutes note, “noted that assessing labor market developments was challenging, with increased immigration, revisions to reported wage data, and possible changes in the underlying rate of productivity growth cited as complicating factors “.

And the official readout added that “several participants” stressed the importance of continuing to use “disaggregated data or information provided by business contacts as a check on readings of labor market conditions.”

The Fed may not be flying blind, but it is still desperately trying to filter out many of the critical signals on the scoreboard.

Reflecting on some of those multiple data upheavals, Atlanta Fed President Raphael Bostic told the Wall Street Journal on Thursday: “This commotion to me is that we should take a break in November. I’m definitely open to it.”

JUNE SWITCH

Much of the confusion over US economic and employment resilience relates to huge revisions to post-pandemic immigration numbers, which have raised labor force forecasts, eased labor shortages and likely dampened growth wages and prices.

But that picture is changing again, with mid-year changes to migration policies and a post-election stance that is up in the air.

Most economists’ thinking on immigration was shaken in February when revisions by the US Congressional Budget Office (CBO) showed there were 3.3 million net immigrants last year, compared with the 1 million expected before the pandemic.

For many economists, this went some way to explaining the surprising strength of the US labor market, consumer spending and overall growth in 2022, even as the Fed tightened lending conditions.

After reconfiguring its projections, CBO said this increase in net immigration could increase the U.S. labor force by 5.2 million over the next 10 years. The organization estimates that this could add about $7 trillion to economic output and $1 trillion in tax revenue.

Those revised forecasts, in turn, have led some private-sector economists to start arguing that the labor market may be hotter than previously expected without sparking new inflation. This has led many to estimate that sustainable monthly wage growth could reach as high as 200,000 by the end of the year.

But the picture complicated again in June, when the US position on immigration changed. President Joe Biden announced two major policy measures: an asylum ban to cut illegal crossings at the US-Mexico border and sweeping measures to legalize many long-term residents married to US citizens.

Economists at Barclays estimate that the combination of Biden’s move, the reduced number of potential immigrants at the southwest border and the suspension of an advance parole program for Cuba, Venezuela, Haiti and Nicaragua has sharply reduced the flows of participants.

They now estimate that so-called “humanitarian” net immigration, which represents people who need protection but are not refugees, is stabilizing at just about 100,000 a month, compared with 300,000 at the end of last year.

That would add about 63,000 to the workforce each month going forward. It is much lower than the level of the last 18 months.

To make matters even more complex, delays in job registrations mean that those who arrived before the June policy move can hold payrolls until the end of 2024 and possibly be reflected in the jobs report in September.

DEFORMATIONS AND DEPORTATIONS

So far, so uncertain—and that’s even before we try to analyze the statistical contortions involved in the assumptions about total population size, the share of US-born citizens expected to join the labor force, and the related effects on the household survey used to to compile unemployment. rate in general.

In addition, wage data may be skewed over the coming month due to recent strikes and devastating hurricanes.

And then there’s the potentially biggest game-changer of all: next month’s US presidential election. Former President Donald Trump’s draconian proposals on immigration represent a clear break with existing policies and those presented by Democratic candidate Kamala Harris.

Trump has not only detailed numerous plans to limit immigration, but has vowed to launch the largest deportation effort in US history.

Given all this, and the significant impact immigration can have on so many aspects of the economy, it’s no wonder the Fed has some trouble seeing the way forward.

The opinions expressed here are those of the author, columnist at Reuters

(By Mike Dolan; Editing by Jamie Freed)