Powell says job market will have to suffer for inflation to fall

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

The data, however, does not mince words.

The Fed’s latest economic projections, released on Wednesday alongside a massive third straight interest rate hike of 75 basis points, show the central bank expects the country’s unemployment rate to hit 4.4% next year. down from 3.7% in August – and potentially up to 5%. Assuming no change in the labor force, this would mean around 1.2 million more people will be unemployed. At the upper end of the Fed’s range, at 5%, that would represent 2.2 million more unemployed workers.

“There is a gradual realization that the idea of ​​being able to reduce labor market tensions by simply limiting the number of job vacancies is over,” said Gregory Daco, chief economist at EY-Parthenon. . “We now have an implicit realization that to cool the labor market will require a significant increase in the unemployment rate and it will require a cooling in job growth with potential job losses.”

In the first eight months of 2022, the United States saw an average net gain of 438,000 jobs per month, according to data from the Bureau of Labor Statistics. In August, 315,000 jobs were added. Before the pandemic, the United States averaged less than 200,000 jobs per month.

Those numbers could go south pretty quickly, Daco said.

“I wouldn’t be surprised if 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. he declared.

Labor market strength is expected to continue to moderate over the coming months, Ataman Ozyildirim, senior director of economics at the Conference Board, noted Wednesday in the latest publication from the leading economic index think tank. The August 2022 index posted a sixth consecutive month of decline, potentially signaling that a recession is imminent, according to the Conference Board.

“The average workweek in manufacturing has contracted in four of the past six months – a notable sign as companies cut hours before reducing their workforce,” Ozyildirim said in a statement. “Economic activity will continue to slow more broadly across the U.S. economy and is expected to contract. A key driver of this slowdown has been the Federal Reserve’s rapid monetary policy tightening to counter pressures inflationary.”

A myriad of factors at play

Still, this isn’t a typical episode of high inflation or a typical labor market, said Robert Frick, a business economist at Navy Federal Credit Union.
The pandemic has capsized the labor market and scrambled supply chains to the point that more than two years later, many of these challenges persist and new ones have been added – such as soaring food and energy prices. – following highly volatile developments such as Russia. the war in Ukraine and extreme weather events.

The Fed can’t just “click on its heels three times, raise rates and drive inflation down,” Frick said.

“There are a myriad of factors in play right now, and it’s a mistake to think the Fed doesn’t control more than a handful of them,” he said.

The Fed can influence demand, however, with higher rates rippling through sectors of the economy, making it harder to buy a home, more expensive to buy a car, or more expensive to finance. of a business, and makes credit card balances much more expensive.
While parts of the demand side of the economy showed some slowdown in response to the Fed’s measures, the labor market remained an outlier. Unemployment remains near historic lows, job openings are double those of people looking for work, and labor force participation remains below pre-pandemic levels.

“I think the Fed is wrong if they think raising rates even to 4% or more will scare the labor market because we are still more than 4 million jobs below pre-trend. -pandemic, and employers are still making the money, and employers still have to hire people,” Frick said. expect the labor market to soften.”

One of the main reasons Fed Chairman Jerome Powell wants more slack in the labor market is because he fears a tight employment situation will continue to drive up wages, which could then keep inflation high. As the unemployment rate rises, workers lose their bargaining power for higher wages and households reduce spending.

“Powell said inflationary wage increases haven’t happened yet, but he thinks it will happen in the future,” Frick said. “It’s 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 or not.”

No “painless” way

To that end, American workers might have to bear the brunt of pain for a problem that is not caused by them.

Powell and the Fed have won over many critics on this front, including Massachusetts Democratic Senator Elizabeth Warren, who tweeted Wednesday that she “warned that Chairman Powell’s Fed would put millions of Americans out of work – and I fear he is already well on his way to doing so.”

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

Powell said prolonged and entrenched high inflation would be even worse than a moderate increase in the unemployment rate. The Fed’s latest economic projections call for GDP growth to slow to 0.2% from 1.7% by the end of this year.
America's reliance on credit cards is growing.  Fed rate hike will make things more painful

“It’s a very slow level of growth, and it could lead to higher unemployment, but I think that’s something we think we need to have,” Powell said. “We think we also need to have looser conditions in the labor market. We’re never going to say there are too many people working, but the real point is this: inflation, what we hear from people when we meet them is that they are really suffering from inflation.”

“If we want to settle in, pave the way for another period of a very strong labor market, we have to put inflation behind us. I wish there was a painless way to do that. there are none,” he added. .

The next batch of key employment data, including monthly job openings, layoffs and gains, will arrive the first week of October when the Bureau of Labor Statistics releases the Job Openings Survey and labor turnover and the monthly employment report for September.

Unemployment claims data released Thursday showed the number of first jobless claims was 213,000 for the week ended September 17, according to the Labor Department. The previous week’s total of 213,000 was revised down by 5,000. Weekly claims, which remain near some of their lowest levels in months, underscore how tightly employers are clinging to workers while the labor market remains full of opportunities for job seekers.

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