Fed splits the difference on labor market pain
For the Federal Reserve, the outlook is a balance between economics and public relations. The central bank is battling the worst inflation in four decades, and economic doctrine suggests that an overheating labor market is creating upward pressures on wages and consumer prices. As this thinking goes, the only way to break the cycle is to raise the unemployment rate – a barbaric principle on the face of it that many Americans would vehemently object to if they could see the opacity of central banking and its economic network. Terminology. For better or worse, though, there is almost no hope that policymakers will devise a better way to tackle inflation anytime soon.
Notable proponents of this doctrine include former Treasury Secretary Lawrence Summers and former IMF chief economist Olivier Blanchard. Speaking this month on the Goldman Sachs Group Inc. podcast, In an optimistic scenario, Blanchard said unemployment may need to rise to at least 5% and possibly reach 6% to 7%. Blanchard Summers and co-author Alex Dumasch are far more pessimistic than the average Wall Street economist in a Bloomberg survey, but they argue that they have history on their side. Optimists say this is a very distinct economic cycle, precipitated by an unprecedented pandemic, and that the Fed’s actions could prompt companies to reduce jobs without necessarily having to lay off many workers. Optimists say this would bring down inflation with limited pain.
Enter Fed Chairman Jerome Powell, who appears to be trying to meet the Wall Street pessimists somewhere in the middle (albeit still more oriented towards the latter). In response to a reporter’s question from Bloomberg’s Michael McKee, Powell said he did not know the possibilities of a recession, but noted that the economy should continue to operate at a slower rate than usual:
There’s a good chance we’ll have a period of what you mentioned is growth below trend, by that I mean much less growth. And we’re seeing that now… that’s a very slow level of growth, and it could lead to an increase in unemployment. So that’s something we think we need to have, and we think we need softer labor market conditions as well.
The Fed’s new median forecasts for 2023 and 2024 are slightly more pessimistic than the Wall Street economist’s average, but still more optimistic than the kind of damage Blanchard and Summers projected. Of course, the rate-setting Federal Open Market Committee has a range of opinions, with governors and regional Fed chairs providing unemployment forecasts of 3.7% to 5% by the fourth quarter of 2023, up from the previous range of 3.2% to 4.5% in their June forecast.
In general, the Fed’s economic forecasts should never be taken literally. Although the FOMC will never say that outright, its forecasts are as much about managing expectations as they are reflections of where it sees the economy heading. On the face of it, however, they signify a move away from broad wishful thinking toward plausibility, and this is at least a positive development toward compromise with the American people.
This column does not necessarily reflect the opinion of the editorial staff or Bloomberg LP and its owners.
Jonathan Levine has worked as a journalist at Bloomberg in Latin America and the United States, covering finances, markets, and mergers and acquisitions. Most recently, he held the position of Head of the Company’s Miami office. He is a chartered CFA.
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