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



Minneapolis
CNN Business

In its historic efforts to lower inflation and cool the economy, the Federal Reserve has used many euphemisms to describe its potential impact on Americans’ jobs, from economic “pain” to “unfortunate spending” and a “softening labor market.”

However, data does not mince words.

The Fed’s latest economic forecasts released on Wednesday show the central bank expects the country’s unemployment rate to rise to 4.4% next year, along with a third straight 75-point interest rate hike. Up from 3.7% in August and potentially up to 5%. Assuming no change in the labor force, that means about 1.2 million more people would be out of work. At the high end of the Fed’s range, 5%, that would leave 2.2 million more unemployed.

“It gradually became clear that rose-colored glasses can only reduce labor market tightness by limiting the number of jobs,” said Gregory Dako, chief economist at EY-Parthenon. “We now implicitly understand that to cool the labor market, there would have to be a significant increase in the unemployment rate and a cooling of employment growth with potential job losses.”

For the first eight months of 2022, the United States gained an average of 438,000 jobs per month, according to data from the Bureau of Labor Statistics. 315,000 jobs were added in August. Before the pandemic, the US averaged fewer than 200,000 jobs per month.

Daco said those numbers could go south relatively quickly.

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

The strength of the labor market is expected to continue to weaken in the coming months, the think tank’s latest Leading Economic Index report noted Wednesday, Ataman Özyildirim, director general of economics at the Conference Board. According to the Conference Board, the index for August 2022 showed a sixth consecutive month of decline, potentially indicating that a recession is imminent.

“The average working week in manufacturing has contracted in four of the past six months – a notable sign as firms cut hours before cutting back on the workforce,” Özyıldırım said in a statement. “Economic activity in the US economy will continue to slow more broadly and will likely contract. The main reason for this slowdown was the rapid tightening of monetary policy by the Federal Reserve to counter inflationary pressures.

Still, it’s neither high inflation nor a typical job market, according to Navy Federal Credit Union corporate economist Robert Frick.

The pandemic has disrupted the labor market and disrupted supply chains to the point where, more than two years later, many of these challenges remain, and new ones have been added, such as rising food and energy prices from highly volatile developments like Russia. War and extreme weather events in Ukraine.

Frick said the Fed can’t just “stomp three times, raise rates and get inflation down.”

“There are countless factors at play right now, and it’s a mistake to think the Fed has control over more than a few of them,” he said.

However, the Fed can affect demand, with higher rates fluctuating across sectors of the economy making it harder to buy a home, more expensive to buy a car or finance a business, and more expensive to carry credit card balances.

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While some parts of the demand side of the economy slowed slightly in response to the Fed’s moves, the labor market remained overperforming. Unemployment remains near historic lows, job openings are twice as many as job seekers, and labor force participation remains below pre-pandemic levels.

“I think the Fed is wrong if it thinks raising rates even 4% or higher will dampen the labor market because we are still 4 million jobs below the pre-pandemic trend and employers are still making gains.” money and employers still need to hire people,” Frick said. “And that’s really, at this point, like saying no to the influx — waiting for the labor market to soften.”

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

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

To that end, American workers may have to bear the brunt of a problem not of their own making.

Powell and the Fed have won many detractors on this front, notably Sen. Elizabeth Warren, a Democrat from Massachusetts. who tweeted on Wednesday he warns that “Chairman Powell’s Fed will put millions of Americans out of work, and I fear he is already well on his way to doing just that.”

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

Powell said prolonged and persistently high inflation would be worse than a moderate increase in the unemployment rate. The Fed’s latest economic projections are for GDP growth to slow to 0.2% from 1.7% by the end of this year.

“It’s a very slow rate of growth, and it could lead to higher unemployment, but I think it’s something we think we need,” Powell said. “We believe that we should also have softer labor market conditions. “We will never say that many people are working, but the real point is: Inflation, what we hear from people when we meet them is that they are really suffering from inflation.”

“If we want to build ourselves up, to pave the way for another era of a very strong labor market, we have to put inflation behind us. I wish there was a painless way to do this. No,” he added.

The next batch 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 Job Openings and Labor Turnover Survey and the monthly jobs report for September.

Jobless claims data released Thursday showed the number of first-time applicants for jobless benefits rose by 213,000 for the week ending Sept. 17, according to the Labor Department. The previous week’s total was revised down 5,000 to 213,000. Weekly claims, which remained near their lowest level in months, underscored how employers are clinging to workers as the labor market remains awash with opportunities for job hunters.





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