Buckle up, America: The Fed plans to sharply increase unemployment
In case the US economy isn’t hurt enough already, the Federal Reserve has a message for Americans: It’s about to get even more painful.
Federal Reserve Chairman Jerome Powell made it clear this week when the central bank projected the benchmark interest rate to reach 4.4% by the end of the year — even if it causes a recession.
“It is very likely that there will be some easing in labor market conditions,” Powell. “We will continue to do so until we are sure the job is done.”
In plain English, this means unemployment. The Fed expects the unemployment rate to rise to 4.4% next year, from 3.7% today — a figure that means an additional 1.2 million people will lose their jobs.
“I wish there was a painless way to do this,” Powell said. “There is no”.
It hurts well?
Here’s the idea behind why raising the nation’s unemployment rates could cool inflation. With one or two more people out of work, the new jobless and their families will cut back on spending, while for most people who are still employed, wage growth will slow. The theory is that when firms assume that their labor costs are unlikely to rise, they will stop raising prices. This, in turn, slows down price growth.
But some economists question whether crushing the labor market is necessary to stop inflation.
“It is clear that the Fed wants the labor market to weaken sharply. What is not clear to us is why,” Ian Shepherdson, chief economist at Pantheon Macro Economics, said in a report. He predicted that inflation is set to “reduce” next year as supply chains return to normal.
The Federal Reserve fears a so-called wage-price spiral, as workers demand higher wages to stay ahead of inflation, and companies pass on higher wage costs to consumers. But experts do not agree that wages are the main driver of hyperinflation today. While workers’ wages have risen an average of 5.5% over the past year, they have fallen due to higher price increases. Former Fed economist Claudia Sam noted on Twitter that at least half of current inflation comes from supply chain issues.
Sahm pointed out that today’s low-wage workers are the ones who benefit most from increased wages and are most affected by inflation – inflation caused by increased spending by wealthy families rather than people at the bottom of the ladder.
Rising rates and declining jobs
While the exact relationship between wages and inflation remains a matter of debate, economists are more clear about how raising interest rates leaves people out of work.
When prices rise, “any consumer item that people take out on debt to buy — whether it’s cars or washing machines — becomes more expensive,” said Josh Bivens, director of research at the Economic Policy Institute.
That means less work for the people who make those cars and washing machines, and eventually layoffs. Other interest rate-sensitive parts of the economy, such as construction, home sales and mortgage refinancing, are also slowing, affecting employment in this sector.
In addition, people travel less, which leads hotels to reduce staff to account for lower occupancy rates. Companies looking to expand – for example, a coffee shop chain opening a new branch – are more reluctant to do so when borrowing costs are high. As people spend less on travel, dining out, and entertainment, hotel and restaurant owners will have fewer customers to serve and therefore fewer employees.
“In the service economy, labor is the largest component of your cost structure, so if you are looking to cut costs, this is where you will look first,” said Peter Bokfar, chief investment officer at Bleakley Financial Group.
While Boockvar sees a rate hike as necessary, the Fed’s tactics view it as aggressive. “I have a problem with [Fed’s] He said, “Speed and scope. They’re advancing so fast and strong, I’m just worried that the economy and the markets can’t handle it.”
Meanwhile, the Fed’s current rate hikes have led to 800,000 job losses, according to forecasts from Oxford Economics.
“When we look at 2023, we see almost no net employment in the first quarter and job losses of more than 800,000 or 900,000 in the second and third quarters combined,” said Nancy Vanden Houten, chief US economist at Oxford.
Others expect a more difficult fall, with Bank of America forecasting a peak unemployment rate of 5.6% next year. This would put an additional 3.2 million people out of work above today’s levels.
Some policymakers and economists have called for aggressive Fed rate hike plans, with Senator Elizabeth Warren say They will “pay back millions of unemployed Americans” and share Connection Theirs is “unforgivable, on the verge of danger.”
Powell promised pain, and many wonder how much pain is necessary.
“Inflation will come down a little faster if we really do stagnate,” Bivens said. “But the cost of that will be much greater.”
The danger, he added, is that the Fed has set off a runaway train. Once unemployment starts to rise sharply, it is difficult to stop it. Instead of accurately stopping at the 4.4% expected by Fed officials, unemployment numbers could easily continue to climb.
“This notion that there is an inflation indicator that the Fed can handle very hard and leave everything else untouched, that’s a fallacy,” Bivens said.
Instead of an easy landing for the economy the Fed says it aims to achieve, Bivens added, “Now we’re shoving the plane down hard and hitting the throttle.”