Buckle up, America: The Fed plans to raise unemployment significantly

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In case the U.S. economy isn’t already hurting enough, the Federal Reserve has a message for Americans: It’s about to get a lot more painful.

Fed chief Jerome Powell made this abundantly clear last week when the central bank predicted its benchmark rate would reach 4.4% by the end of the year — even if that would trigger a recession.

“There will very likely be some softening of labor market conditions,” Powell he said in his September 21 economic outlook. “We will continue to do this until we are sure the job is done.

In plain English it means unemployment. The Fed predicts that the unemployment rate will rise to 4.4% next year from 3.7% today – a number that means an additional 1.2 million people will lose their jobs.

“I wish there was a painless way to do it,” Powell said. “It isn’t.”

Does it hurt that good?

Here’s an idea why an increase in unemployment in a country could cool inflation. With another million or two people out of work, the newly unemployed and their families would cut spending sharply, while wage growth would stagnate for most people still working. When companies assume that their labor costs are unlikely to rise, the theory goes, they stop raising prices. This in turn slows price growth.

“I expect that achieving price stability will require slower employment growth and somewhat higher unemployment,” Susan Collins, president of the Federal Reserve Bank of Boston, said Monday. speech. “And I take very seriously that unemployment is painful and that its costs are disproportionately concentrated among groups that have traditionally been marginalized.”

But some economists question whether it is necessary to crush the labor market to bring inflation down.

“The Fed clearly wants the labor market to weaken quite sharply. What’s not clear to us is why,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a note. He predicted that inflation will “tumble” next year as supply chains normalize.

The Fed fears a so-called wage-price spiral, in which workers demand higher wages to stay ahead of inflation and companies pass those higher wage costs on to consumers. But experts disagree that wages are the main driver of today’s red-hot inflation. While workers’ wages rose an average of 5.5% over the past year, they were overshadowed by even higher price increases. At least half of today’s inflation comes from supply chain issues, former Fed economist Claudia Sahm noted in a tweet.

Sahm noted that lower-wage workers today have benefited the most from wage increases and have been hurt the most by inflation — inflation driven by higher spending by wealthy households rather than people lower down the ladder.

Rising rates, falling jobs

While the exact relationship between wages and inflation remains a matter of debate, economists have a much clearer picture of how rising interest rates put people out of work.

When rates rise, “any consumer item that people take on debt for — whether it’s cars or washing machines — will become more expensive,” said Josh Bivens, director of research at the Economic Policy Institute.

That means less work for the people who make these 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, impacting employment in the sector.

In addition, people are traveling less, which leads hotels to reduce staffing due to lower occupancy rates. Businesses looking to expand—say, a coffee chain opening a new branch—are hesitant to do so when borrowing costs are high. And as people spend less on travel, dining and entertainment, these hoteliers and restaurateurs will have fewer customers to serve and will eventually cut back on staff.

“In a service economy, labor is the largest component of your cost structure, so if you want to reduce costs, that’s where you look first,” said Peter Boockvar, chief investment officer at Bleakley Financial Group.

While Boockvar says rate hikes are needed, he finds the Fed’s tactics aggressive. “I have a problem with that [Fed’s] speed and scale,” he said. “They’re coming so fast and hard, I’m just worried that the economy and the markets won’t be able to handle it.”


The Fed’s potential rate hike raises fears of an economic downturn

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We are facing layoffs

Meanwhile, the Fed’s current rate hike has cost about 800,000 jobs, according to Oxford Economics forecasts.

“Looking out to 2023, we see almost no net hiring 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, Oxford’s chief U.S. economist.

Others predict an even harder landing, with Bank of America expecting a record 5.6% unemployment rate next year. This would put an additional 3.2 million people out of work on top of today’s levels.

Some policymakers and economists have called on the Fed for aggressive plans to raise rates, with Sen. Elizabeth Warren saying “they would put millions of Americans out of work” and Sahm profession they are “inexcusable, bordering on dangerous”.

Powell has promised pain, and many are questioning how much pain is necessary.

“Inflation will come down a little faster if we actually hit a recession. But the cost will be much higher,” Bivens said.

The prospect of higher layoffs also comes as many Americans see their wealth decline due to the stock market slump, with the S&P 500 down 22% this year — “bear market” terrain. Total household net worth fell by more than $6 trillion between April and June — more than half of the $11.1 trillion in wealth that evaporated over five quarters during the 2007-2009 financial crisis, according to Oxford Economics.

The danger, Bivens said, is that the Fed has set off a bandwagon. Once unemployment starts to skyrocket, it is hard to stop it. Rather than stopping neatly at the 4.4% rate predicted by Fed officials, the jobless numbers could easily continue to rise.

“This notion that there’s an inflation dial that the Fed can pull really hard and leave everything else untouched is wrong,” Bivens said.

Instead of the soft landing for the economy that the Fed says it’s trying to achieve, Bivens added, “we’re now taking the plane down pretty hard and hitting the accelerator.”



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