Thomas Barkin is President and CEO of the Federal Reserve’s Fifth District branch headquartered in Richmond. Beginning the job during the tumultuous and confusing 2018 (for those wherever at the Fed), Barkin in 2021 is and has been a voting FOMC member. Whether he is judged a “hawk”, “dove”, or some other kind of feathering maniac I’d leave to the mainstream’s infatuation with Greenspan and Volcker legends. It isn’t actually important.

On the contrary, the flattening yield curve particularly from the middle out to the 10s indicates he like the rest of the FOMC is setting foot on familiar ground – making the same serious error by depending upon the faulty unemployment rate. It led Ben Bernanke and Janet Yellen astray seven and eight years ago, and then did in their successor Jay Powell the first time back in ’18 when Barkin was first admitted to the Committee (as a non-voting rotating seat).

The shifting thoughts from the Fifth District’s topman are a perfect illustration of this very problem. Below is a sample from what he said last week about the labor market. He was questioning whether or not those millions outside of it will ever come back:

We have nearly 262 million people ages 16 or older in the United States. Almost 60 percent — roughly 154 million people — are employed. That leaves us nearly 108 million on the sidelines. Of those, approximately 8 million are unemployed, defined as actively seeking employment. This translates to an unemployment rate of 4.8 percent. In South Carolina, that number looks better, at 4.2 percent.

But, as evident in this recovery, the unemployment rate tells only a part of the story. It misses the roughly 100 million individuals (about 1.8 million in South Carolina) who aren’t working and haven’t recently looked for work.

Barkin then goes on to blame this shortfall on…other factors. He specifically cites four: “mismatches, family care, health and incentives. All these issues existed before the pandemic, but it’s fair to say they have intensified in the last 18 months.”

Yep, the workforce is largely to blame, an echo of the pre-2020 lazy American excuse.

Workers in this country, according to Mr. Barkin and so many others at the Fed and in the media, won’t move or go back to school (“mismatches”), aren’t eager to find other means for childcare (“family care”), and are subject to various benefits cliffs (“health and incentives”) they’ll languorously hold onto for dear life rather than attempt to outpace them with meaningfully better earned income opportunities (assuming they exist).

Interestingly enough, this same Tom Barkin was questioning the behavior of these same not-in-the-workforce millions sixteen months ago. Closer in on the recession and first round of reopening, Mr. Barkin wondered again in the media whether or not those incredible multitudes in June 2020 would ever make it back into it.

Though he had a very different reason for doubting back then:

In many cases they will be back in jobs that they had before as those businesses come back. But in many cases they won’t, I think there are jobs that will go away. [emphasis added]

Thinking there may end up being permanent job losses in 2020, only to reconsider that in 2021 as, what? The unemployment rate. The continuous screams of LABOR SHORTAGE!!!!

Some of those things should have been material for the labor data, at least, in September 2021; but were not. In other words, we’d already heard previously about parents who couldn’t arrange childcare with schools closed and unemployment benefits paying others way too much to vacation at home – both of those picked up under Barkin’s renovated workforce formulation.

Instead, the official count in the labor force declined last month even as benefits dropped and were dropped, and children were near universally back in school. No flood of workers from outside back in. Everyone says there are too many jobs available, but are there? Is the economy really that much better in 2021 than was thought mid-2020?

Every (inflation) story of late uniformly describes how it could only be this way, as if any other explanation utterly impossible. Yet, as noted earlier, yield curve flattening.

Bonds are betting the Fed explanation, this newer one, is wrong. Same way as all those times before, too.

Even as nominal rates have come back up, it’s not really how far they’ve come back since mid-March; first of all, they remain nowhere near 2018 or even 2017. The yield curve is way, way behind the economic scenario envisioned by what seems to have changed Barkin’s opinion from 2020 to 2021 of the same problem.

The interruption between March and today is more important along these lines than many will appreciate. If the economy was as it “should” have been, inflationary red hot, there wouldn’t have been an elongated gap since which on the other side of it is an entirely different curve dynamic. 

This other side, the current retracement side, is now different from earlier in the year (steepening), suddenly the wrong kind (flattening) being driven more by the Fed making the mistake relying on the unemployment rate. If that stat had been a useful representation of the real state of the real economy, rates wouldn’t have paused on their way up above and beyond.

The rise in nominal rates earlier in the year, the steepening curve, that would’ve been Barkin’s argument in October 2021. Instead, even though nominal rates have partially retraced, today they are doing it for very different reasons; that the Fed now is making a mistake about the economy (or that it’s just autumn). In other words, current flattening is Barkin’s view from 2020; “I think there are jobs that will go away” and increasingly likely they will never come back no matter how hard Economists and Fed officials yet again try to convince themselves and the public the economy’s more than fine, it’s inflationary fine.