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


Minneapolis
CNN business

In its efforts to reduce historic inflation and cool the economy, the Federal Reserve has used multiple euphemisms to describe the potential impact on American jobs, from economic “pain” to “unfortunate costs” and a “labor market.” in softening “.

The data, however, does not mince words.

The Fed’s latest economic projections, released Wednesday along with a massive third consecutive 75bp interest rate hike, show the central bank expects the nation’s unemployment rate to rise to 4.4% next year. up from 3.7% in August and potentially up to 5%. Assuming there are no changes in the workforce, this would mean that around 1.2 million more people will be unemployed. At the high end of the Fed’s 5% range, there would be 2.2 million more unemployed.

“There is a gradual realization that the rosy vision of eyewear of being able to reduce labor market rigidity by limiting the number of job openings has vanished,” said Gregory Daco, chief economist at EY-Parthenon. “We now have an implicit awareness that a significant increase in the unemployment rate will be required to cool the labor market and a cooling of employment growth with potential job losses will be required.”

During the first eight months of 2022, the United States experienced an average net increase 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 United States averaged fewer than 200,000 jobs per month.

Those numbers could go south relatively quickly, Daco said.

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

Labor market strength is expected to continue to moderate in the coming months, Ataman Ozyildirim, senior director of economics at the Conference Board noted Wednesday in the latest release of the think tank’s Leading Economic Index. The August 2022 index showed a sixth consecutive month of declines, potentially signaling an impending recession, according to The Conference Board.

“The average workweek in manufacturing has contracted in four of the past six months, which is a remarkable sign as companies reduce the hours before reducing their workforce,” Ozyildirim said in a statement. “Economic activity will continue to slow more widely across the US economy and is likely to contract. One of the main drivers of this slowdown was the rapid tightening of monetary policy by the Federal Reserve to counteract inflationary pressures ”.

However, this is not a typical bout of high inflation nor a typical job market, said Robert Frick, a business economist at the Navy Federal Credit Union.

The pandemic has turned the labor market upside down and confused supply chains to the point that, more than two years later, many of these challenges persist and new ones have been added, such as rising food and energy prices, as a result. of highly volatile developments such as that of Russia’s war in Ukraine and extreme weather events.

The Fed cannot simply “push its heels three times, raise rates and bring down inflation,” Frick said.

“There’s a myriad of factors going on now, and it’s a mistake to think the Fed controls no more than a handful of those,” he said.

The Fed can influence demand, however, with higher rates spreading across different areas of the economy making it more difficult to buy a home, more expensive to buy a car or finance a business, and making much more expensive credit card balances.

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While parts of the demand side of the economy showed some slowdown in response to the Fed’s moves, the job market remained an outlier. Unemployment remains close to historically low levels, job opening is double that of job seekers and labor force participation remains below pre-pandemic levels.

“I think the Fed is wrong if it thinks that rising rates, even to 4% or more, can intimidate the job market, because we are still over 4 million jobs below the pre-pandemic trend and employers jobs are still earning money and employers have yet to hire people, “Frick said.” And it’s really, at this point, like telling the tide not to come in, expecting the job market to soften. ”

One of the main reasons Fed Chairman Jerome Powell wants more flexibility in the labor market is concern that a tight employment situation will continue to drive up wages, which could then keep inflation high. As the unemployment rate rises, workers lose bargaining power for higher wages and families withdraw spending.

“Powell said the wage increases that contribute to inflation have not yet occurred, but he sees it will happen in the future,” Frick said. “This is all very theoretical at this point. And I understand that if you want to reduce demand, one way to do it is to increase unemployment … but I really think it’s an open question whether it’s a problem now or not. ”

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

Powell and the Fed have earned many detractors on this front, most notably Massachusetts Democratic Senator Elizabeth Warren. who tweeted on Wednesday that she “warned that President Powell’s Fed would kick millions of Americans out of work – and I fear she is already on track to do so.”

“It’s not fair,” Frick said. “But no one ever said the economy wasn’t cruel at times.”

Powell said sustained and entrenched high inflation would be even worse than a moderate rise in the unemployment rate. The Fed’s latest economic projections forecast GDP growth to slow to 0.2% from 1.7% by the end of this year.

“This is a very slow level of growth and could result in a rise in unemployment, but I think it’s something we think we should have,” Powell said. “We think we also need to have softer conditions in the labor market. We will never say that 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 prepare, pave the way for another very strong labor market period, we need to raise inflation. I wish there was a painless way to do it. There isn’t, “she added.

The next batch of key employment data, including job openings, layoffs and monthly earnings, will come in the first week of October, when the Bureau of Labor Statistics releases the survey on job openings and job turnover and the monthly work report for September.

Data on unemployment insurance claims released Thursday showed that the number of first-time applications for unemployment benefits was 213,000 for the week ending Sept. 17, according to the Department of Labor. The previous week’s total of 213,000 was revised down by 5,000. Weekly demands, which remain close to some of the lowest levels in recent months, underscore how employers hold tight to workers as the labor market remains full of opportunities for job seekers.

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