Business

The Fed’s fight against inflation could cost the US 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 Americans’ jobs, from economic “pain” to “unfortunate costs” and a job market”.

However, data does not mince words.

The Fed’s latest economic forecast, released Wednesday alongside a massive third straight rate hike of 75 basis points, shows the central bank expects the country’s unemployment rate to rise to 4.4% next year. an increase of 3.7% in August – and possibly as much as 5%. If the workforce does not change, there would be about 1.2 million more people unemployed. At the top end of the Fed’s range, at 5%, that would be 2.2 million more unemployed.

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“There is a gradual realization that the pink-toned vision of alleviating labor shortages by simply reducing the number of job openings has faded,” said Gregory Daco, chief economist at EY-Parthenon. “We now have the implicit realization that to cool the labor market there needs to be a significant rise in unemployment and there needs to be a slowdown in employment growth with possible job losses.”

For the first eight months of 2022, the United States posted an average net income of 438,000 jobs per month, data from the Bureau of Labor Statistics shows. In August, 315,000 jobs were added. Before the pandemic, the US averaged fewer than 200,000 jobs per month.

Those numbers could move south relatively quickly, Daco said.

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

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Labor market strength is expected to continue to moderate in the coming months, Ataman Ozyildirim, senior economics director at The Conference Board, noted Wednesday in the latest release of the think tank’s Leading Economic Index. The August 2022 index saw a sixth straight month of declines, which The Conference Board says may indicate a recession is imminent.

“The average workweek in the manufacturing industry has shrunk in four of the past six months — a remarkable sign as companies cut back hours before cutting headcount,” Ozyildirim said in a statement. “Economic activity will generally continue to slow across the US economy and is likely to contract. A major cause of this slowdown is the rapid tightening of monetary policy by the Federal Reserve to counter inflationary pressures.”

Still, this isn’t a typical period of high inflation or a typical job market, said Robert Frick, a business economist at the Navy Federal Credit Union.

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The pandemic has capsized the labor market and shook up supply chains to the point where, more than two years later, many of those challenges still exist and new ones have been added – such as rising food and energy prices – due to highly volatile developments such as the Russian war in Ukraine and extreme weather conditions.

The Fed can’t just “click on the heels three times, raise interest rates and lower inflation,” Frick said.

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

However, the Fed can affect demand, with higher rates rippling through parts of the economy, making it harder to buy a house, more expensive to buy a car or more expensive to finance a business, and credit card balances much more expensive. to make.

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While parts of the demand side of the economy slowed somewhat in response to the Fed’s measures, the labor market continued to be an outlier. Unemployment remains close to historically low, there are twice as many job vacancies as job seekers, and the employment rate remains below pre-pandemic levels.

“I think the Fed is wrong in thinking that raising interest rates, even to 4% or more, will contract the labor market, as we still have more than 4 million jobs below the pre-pandemic trend. and employers are still making a profit. money, and employers still have to hire people,” Frick said. “And it’s really like telling the tide at this point not to come — to expect the job market to soften.”

A key reason Fed Chair Jerome Powell wants more slack in the labor market is a concern that a tight employment situation will continue to push wages higher, which could keep inflation high. As unemployment rises, workers lose bargaining power for higher wages and households pull back on spending.

“Powell has said there have been no wage increases contributing to inflation yet, but he sees this happening in the future,” Frick said. “This is all very theoretical at the moment. 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 or not.”

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

Powell and the Fed have earned many adversaries on this front, most notably Democratic Senator Elizabeth Warren of Massachusetts, who tweeted on wednesday that she “warned that Chairman Powell’s Fed would put millions of Americans out of work — and I fear he’s already on his way to doing that.”

“It’s unfair,” Frick said. “But no one ever said that sometimes economics isn’t cruel.”

Powell has said that prolonged and entrenched high inflation would be worse than a moderate rise in unemployment. According to the latest economic forecasts from the Fed, GDP growth will slow to 0.2% from 1.7% by the end of this year.

“That’s a very slow level of growth and it could lead to a rise in unemployment, but I think we think we need that,” Powell said. “We think we also need softer labor market conditions. We would never say that there are too many people at work, but the real point is this: inflation, what we hear from people when we meet them is that they really suffer from inflation.

“If we want to position ourselves, pave the way for a new era of a very strong labor market, we need to get inflation behind us. I wish there was a painless way to do that. There isn’t one,” he added.

The next batch of key employment data, including openings, layoffs and monthly job growth, comes in the first week of October, when the Bureau of Labor Statistics releases the Job Openings and Labor Turnover Survey and monthly jobs report for September.

Unemployment claim data released Thursday showed the number of first-time jobless claims was 213,000 for the week ending Sept. 17, the Labor Department said. Last week’s total of 213,000 was revised down by 5,000. The weekly claims, which remain near some of their lowest levels in months, underline how tight employers are holding on to employees as the job market remains full of opportunities for job seekers.

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