Trying to make sense of three basic facts about our macroeconomy:
(1) Fed has tightened substantially over past 15 months.
(2) There are essentially no visible effects in the labor market.
(3) Price inflation has fallen.

Why hasn't tightening impacted unemployment or wage growth? There are lags (see
). But today's jobs report goes in the wrong direction. Even construction employment is still rising!

A second possibility is lagged effects of 2021 stimulus due to Keynesian cross effects. Income growth remains high, which drives spending, which keeps income growth high...

A third is ongoing other demand shocks, including lingering state and local spending from ARP and the new legislation from 2022 on infrastructure and climate. First key question for Fed is how to sort out monetary policy lags from these other two factors.

Why have prices fallen if labor market has not tightened? Points to combination of unwinding of previous adverse shocks (TRANSITORY supply constraints) and recent favorable supply shocks (warm weather reducing energy consumption).

Second key question for monetary policy is whether favorable supply shocks are enough to bring inflation back all the way to target. Current wage growth suggests maybe not (
).

Overall, certainly a different path toward lower inflation than what a year ago I labeled the Fed's forecast of immaculate disinflation:
.