Science

Buckle up, America: Fed plans to sharply boost unemployment

If the US economy wasn’t already hurting enough, the Federal Reserve has a message for Americans: It’s about to get a lot more painful.

Fed Chair Jerome Powell made that starkly clear last week when the central bank projected its benchmark rate to reach 4.4% by the end of the year – even if it turns into a recession.

“There is a high probability that there will be some easing of labor market conditions,” Powell Its September 21st. said in economic outlook. “We will continue this until we are confident that the job is done.”

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

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

hurt so good?

Here’s the idea behind why inflation can calm down by boosting the country’s unemployment. With an additional million or two people out of work, the newly unemployed and their families will cut spending sharply, while for most people who are still working, wage growth will be flat. When companies recognize that their labor costs are unlikely to rise, the theory goes, they will stop raising prices. This, in turn, slows down inflation.

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

But some economists question whether it is necessary to crush the job market to bring inflation to its peak.

“The Fed clearly wants the labor market to weaken significantly sharply. It is not clear to us why this is so,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a report. He predicted that inflation is set to “fall” next year when the supply chain returns to normal.

The Fed fears a so-called wage-price spiral, in which workers always 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 have increased by an average of 5.5% over the previous year, this has been eclipsed by an even greater price increase. At least half of today’s inflation comes from supply-chain issues, said former Fed economist Claudia Sahm in a tweet.

Sahm said low-wage workers today benefited the most from wage increases and were hurt the most by inflation – while inflation is driven by higher spending by wealthy families rather than those at the bottom of the ladder.

Rising Rates, Falling Jobs

While the exact relationship between wages and inflation remains a matter of debate, economists are very clear about how raising interest rates puts people out of work.

When rates rise, “any consumer item that people take out a loan to buy — whether it’s an automobile or a washing machine — becomes more expensive,” said Josh Bivens, director of research at the Economic Policy Institute.

That means less consumer demand for those cars and washing machines, and less work for the people who make them — and eventually, layoffs. Other parts of the economy sensitive to interest rates, such as construction, home sales and mortgage refinancing, also slow down, affecting employment in that sector.

In addition, people travel less, which leads to fewer staff at hotels, due to lower occupancy rates. Businesses that want to expand — say, a coffee shop chain is opening a new branch — are more hesitant to do so when borrowing costs are high. And as people spend less on travel, eating out, and entertainment, those hoteliers and restaurants will have fewer customers to serve and eventually cut back on staff.

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

While the rate hike is needed in Bookover’s view, the Fed’s strategy calls it aggressive. “I just have a problem [Fed’s] Speed ​​and scale,” he said. “They are coming on so fast and strong, I just worry about the economy and the markets can’t handle it.”


Possible Fed interest rate hike raises fears of economic slowdown

05:20

To be sure, high inflation hurts low-income workers the most, as they have the least ability to absorb price increases—a point Powell said repeatedly in his rate-hike argument.


But while rate hikes have begun to slow growth in housing prices, economists doubt they can do much to reduce the cost of food and energy, other key components of the working class budget.

Dean Baker, co-director, “High interest rates from the Fed are not going to have much effect on the price of wheat or oil, except that other central banks also raise rates in response to the Fed’s actions and slower elsewhere.” develop at a rapid pace.” Center on economic and policy priorities, tweeted on Tuesday,

The hike in interest rates also doesn’t address another inflation driver: Companies are raising prices for raw materials far more than cost increases. Federal data shows corporate profits soared to record levels in the first half of this year, with plenty of retail and consumer-goods companies claiming their power to drive up prices to investors.

“A year ago, a month ago, he said, ‘We have to raise prices because our costs have gone up.’ They raised prices, we now know, more than they cost,” said Robert Reich, former President Bill Clinton’s secretary of labor and now a professor at the University of California, Berkeley.

“The public needs to understand that the average large company has far more pricing power than at the beginning of the last century,” he said.

layoff ahead

According to predictions from Oxford Economics, the Fed’s current rate hikes have caused the loss of about 800,000 jobs in the pipeline.

“When we look 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 Houghton, Oxford’s chief US economist. Is.”

Others predict an even harder landing, with Bank of America expecting a peak unemployment rate of 5.6% next year. This would put an additional 3.2 million people out of work above today’s levels., A recent study by the International Monetary Fund predicted that unemployment would need to reach 7.5% in order to have an impact on inflation – more than double its current level.

“For doing what they’re trying to do, they’re probably going to lose millions of jobs,” Reich said of the Fed.

Some policymakers and economists with Senator Elizabeth Warren have called the Fed’s aggressive rate hike plans Saying They will “fire millions of Americans out of work” and Sahm Call them “on the unforgivable, dangerous border.”

Powell promised pain, and many are questioning how urgent the pain is.

“If we really hit a recession, inflation will come down pretty quickly. But the cost is going to be huge,” Bivens said.

The danger, Bivens said, is that the Fed has stopped a running train. Once unemployment starts rising rapidly, it is difficult to stop. Instead of stopping neatly at the 4.4% rate projected by Fed officials, the jobless number could easily continue to rise.

“The idea that there is an inflation dial that the Fed can push really hard and leave everything else untouched is an illusion,” Bivens said.

Instead of the soft landing for the economy the Fed says it aims for, Bivens said, “we’re now pointing the plane too hard on the ground and hitting the accelerator.”

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button