The Fed’s fight against inflation could cost the US 1.2 million jobs

The data, however, do not speak.

The Fed’s latest economic outlook, along with its third consecutive big interest rate hike of 75 basis points released on Wednesday, shows the central bank expects the nation’s unemployment rate to rise to 4.4% next year. from 3.7% in August – and potentially 5%. If there is no change in the labor force, this means that about 1.2 million more people will be unemployed. At the top of the Fed’s range, at 5%, there would be 2.2 million more unemployed.

“The rose-tinted vision of being able to reduce the tightness of the labor market by reducing the number of job openings is slowly being realized,” said Gregory Daco, chief economist at EY-Parthenon. “We are now implicitly aware that to cool the labor market there will have to be a significant increase in the unemployment rate and that job growth will have to cool with potential job losses.”

In the first eight months of 2022, the United States has averaged a net gain of 438,000 jobs per month, data from the Bureau of Labor Statistics show. In August, 315,000 jobs were added. Before the pandemic, the US averaged fewer than 200,000 jobs each month.

Those numbers can go south pretty quickly, Daco said.

“I wouldn’t be surprised that in an environment where companies are more cautious and apply more discretion in hiring decisions, we could see some net potential job losses by the end of the year,” he said.

Labor market strength is expected to continue to moderate in the coming months, Ataman Ozyildirim, chief economist at The Conference Board, said Wednesday in the think tank’s latest publication of the Leading Economic Index. The index for August 2022 showed a decline for the sixth consecutive month, signaling a recession is imminent, according to The Conference Board.

“The average manufacturing workweek contracted in four of the last six months – a significant sign as companies cut hours before cutting staff,” Ozyildirim said in a statement. “Economic activity will continue to slow more broadly across the US economy and is likely to contract. A major driver of this slowdown has been the Federal Reserve’s rapid tightening of monetary policy to combat inflationary pressures.”

Several factors at play

Still, this is not a typical high-inflation, or typical labor market, said Robert Frick, corporate economist at Navy Federal Credit Union.
The pandemic upended the labor market and disrupted supply chains, more than two years later, many of these challenges still remain and others have been added, such as rising food and energy prices, due to highly volatile developments in Russia. The war in Ukraine and extreme weather events.

The Fed cannot “click its heels three times, raise rates and lower inflation,” Frick said.

“There are a number of factors going on right now, and it’s a mistake to think that the Fed controls more than a few of them,” he said.

The Fed can affect demand, however, as higher rates ripple across areas of the economy, making it more difficult to buy a home, finance a car or business, and make credit card balances much more expensive.
While some parts of the economy’s demand have slowed in response to the Fed’s moves, the labor market has been left out. Unemployment remains near historically low levels, job openings are double the number of people looking for work, and labor force participation remains below pre-pandemic levels.

“I think if the Fed is wrong that raising rates, even to 4% or more, will tighten the labor market because we’re still over 4 million jobs below the pre-pandemic trend, and employers are still making money, and employers still need to hire people. they have,” said Frick. “And really, at this point, it’s like saying don’t let the tide go in – expect the job market to soften.”

The main reason Fed Chairman Jerome Powell wants a slower pace in the labor market is his concern that a tight employment situation will keep wages up, which could keep inflation high. As the unemployment rate rises, workers lose their bargaining power for higher wages and households hold back on spending.

“Powell said that wage increases that affect inflation haven’t happened yet, but he sees it happening in the future,” Frick said. “This is all very theoretical at this point. And I understand that if you want to reduce demand, one way to do that is to increase unemployment … but I really think it’s an open question whether it’s a problem now.”

There is no “pain free” way

To do this, American workers may have to suffer pain caused by a problem not of their own making.

Powell and the Fed have won a number of detractors on this front, most notably Democratic Senator Elizabeth Warren of Massachusetts. who tweeted on Wednesday “Chair Powell’s Fed has warned that it would put millions of Americans out of work, and I fear it is already well on its way to doing so.”

“It’s unfair,” Frick said. “But nobody ever said the economy wasn’t cruel at times.”

Powell said prolonged, sustained high inflation would be even worse than a moderate rise in the unemployment rate. The Fed’s latest economic forecast is for GDP growth to slow to 0.2% by the end of this year from 1.7%.
America's addiction to credit cards is on the rise.  A Fed rate hike will make it more painful

“The level of growth is very slow, and it could lead to increases in unemployment, but I think that’s what we think we should have,” Powell said. “We believe that we also need to have softer labor market conditions. We will never say that too many people are working, but the real issue is this: Inflation is what we hear when we meet with people. They are really experiencing inflation.”

“If we want to establish ourselves, if we want to clear the way for another period of a very strong labor market, we have to leave inflation behind. I wish there was a painless way. There isn’t,” he added. .

The next set of key employment data, including openings, layoffs and monthly job gains, will come in the first week of October when the Bureau of Labor Statistics releases its Survey of Job Openings and Labor Turnover and its monthly jobs report for September.

Jobless claims data released Thursday showed that initial claims for jobless benefits totaled 213,000 in the week ended Sept. 17, according to the Labor Department. The previous week’s total of 213,000 was revised down by 5,000. The weekly claims, which remain near their lowest levels in months, underscore how employers are holding on to workers as the labor market remains full of opportunities for job hunters.