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

However, the data does not taint the words.

The Federal Reserve’s latest economic forecast was released on Wednesday In addition to the massive rise in interest rates by 75 basis points in a row for the third time in a rowIt turns out that the central bank expects the country’s unemployment rate to rise to 4.4% next year Up from 3.7% in August – and possibly as high as 5%. Assuming no change in the labor force, this means that about 1.2 million people will be out of work. At the upper end of the Fed’s range, at 5%, that would be 2.2 million unemployed people.

“There is a gradual realization that the rosy view of the ability to reduce labor market tightness by reducing the number of job vacancies is gone,” said Gregory Daco, chief economist at EY-Parthenon. “We now have the tacit realization that in order to cool the labor market, a significant increase in the unemployment rate will be required and employment growth will need to be cooled with potential job losses.”

Bureau of Labor Statistics data shows that during the first eight months of 2022, the United States saw an average net profit of 438,000 jobs per month. in August, 315,000 jobs have been added. Before the pandemic, the average number of jobs in the US was less than 200,000 per month.

Those numbers could go south relatively quickly, Dako said.

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

Job seekers visit booths during the Spring Job Fair at the Las Vegas Convention Center.
Labor market strength is expected to continue to moderate in the coming months, Ataman Ozeldirim, chief economics director at The Conference Board, noted Wednesday in the think tank’s latest leading economic indicator release. The August 2022 index showed a decline for the sixth month in a row, which may indicate that a recession is imminent, According to the Conference Board.

“The average workweek in manufacturing has shrunk in four of the past six months – a milestone, as companies reduce working hours before reducing their workforce,” Ozeldirim said in a statement. “Economic activity will continue to slow more broadly across the US economy and is likely to contract. The main driver of this slowdown has been the Federal Reserve’s rapid tightening of monetary policy to counter inflationary pressures.”

Countless factors at play

However, this is not a typical fit high inflation Nor typical job marketsaid Robert Frick, corporate economist at Navy Federal Credit Union.
The pandemic has upended the labor market and spurred supply chains to the point that, more than two years later, many of these challenges still exist and new ones have been added – such as a spike. food And the energy Prices – as a result of highly volatile developments such as the Russian war in Ukraine and extreme weather events.

Frick said the Fed can’t “squeeze its heels three times, raise interest rates and lower inflation.”

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

The Federal Reserve can influence demand, however, with higher ripple rates across areas of the economy Which makes buying a home more difficultMore expensive To buy a car or finance a companyAnd the Make credit card balances much more expensive.
While parts of the demand side of the economy have shown some slowdown in response to the Fed’s moves, the labor market has stayed away. The unemployment Still near historically low levels, Double job opportunities People looking for work, and workforce participation Still below pre-pandemic levels.

“I think the Fed is wrong if it thinks that raising interest rates, even to 4% or higher, will weaken the labor market, because we are still less than 4 million jobs in the pre-pandemic trend, employers are still making money, and still Employers have to hire people.” “And really, at this point, it’s like telling the tide not to come – expecting the labor market to weaken.”

One of the main reasons Fed Chairman Jerome Powell wants more slack in the labor market is concern that the tight employment situation will continue to raise wages, which could lead to higher inflation. As unemployment rises, workers lose bargaining power for higher wages and families fall 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. “This is all very theoretical at this point. And 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 or not that’s a problem now.”

There is no “painless” path forward

To that end, American workers may have to bear the brunt of the pain because of a problem they did not cause.

Powell and the Federal Reserve have won many critics on this front, notably Massachusetts Democrat Elizabeth Warren, who tweeted on wednesday She “was warning that President Powell’s Fed is going to put millions of Americans out of work – and I’m afraid he’s already on his way to doing so.”

“It’s unfair,” Frick said. “But no one ever said the economy wasn’t so tough sometimes.”

Powell said protracted high inflation has its roots It will be worse moderate increases in the unemployment rate. Federal Reserve Latest Economic Forecasts GDP growth is expected to slow to 0.2% from 1.7% by the end of this year.
America's dependence on credit cards is increasing.  A rate hike by the Fed will make it more painful

“That’s a very slow level of growth and it could lead to more unemployment, but I think that’s something we think we need to achieve,” Powell said. “We think we need softer labor market conditions as well. We would never say there are too many people working, but the real point is: inflation, what we hear from people when we meet them is that they are really suffering from inflation.”

He added, “If we are to position ourselves, and light the way to another period of a very strong labor market, we have to put inflation behind us. I wish there was a painless way to do it. There isn’t.” .

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

Unemployment claims data released Thursday showed that the number of first-time applications for unemployment benefits was 213,000 for the week ending September 17, according to the Labor Department. The previous week’s total of 213,000 was revised down by 5,000. The weekly claims, which are still near some of their lowest levels in months, underscore how tightly employers are holding onto workers as the job market remains rife with opportunities for job seekers.

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