Fed Chairman Jerome H. Powell spent his time mourning what the United States had lost in the early days of the pandemic. Historically, a very strong labor market has given a boost to the marginalized and given opportunities to people and communities that have long been without workers.
“We are desperate to get the economy back on track and return to a tight labor market with low unemployment, high labor force participation and rising wages. It’s a thing,’ he said.Mr Powell said NPR interview In September 2020.
The Fed chairman granted that wish. The labor market is recovering in almost all major indicators, employment rate The proportion of people in their most active working age surpassed the 2019 high, reaching a level not seen since April 2001.
But one of the biggest risks to that strong rebound is Mr. Powell’s Fed itself. Economists have spent months predicting that workers won’t be able to sustain all the recent labor market gains as the Fed aggressively attacks rapid inflation. The central bank has hiked interest rates significantly to cool the economy and job market, but many economists predict the move could push unemployment higher and even push the U.S. into recession. .
But now an interesting possibility has surfaced. Can the United States keep inflation in check and maintain labor market gains?
Last week’s data showed that price gains are starting to slow down in earnest, and that trend is expected to continue in the coming months. The long-awaited cooldown has occurred even though unemployment remains rock bottom and employment remains healthy. The combination does not yet guarantee the prospect that Mr. Powell’s central bank may succeed in a soft landing, where growth will continue slowly, with most workers remaining employed even when inflation returns to normal. No, but it is rising.
“There are good reasons why inflation is falling and why we should expect inflation to fall further,” said Julia Pollack, chief economist at ZipRecruiter. “Many economists argue that the last mile of reducing inflation is the most difficult, but that is not always the case,” she said.
Inflation has plummeted to 3%, just a third of last summer’s peak of 9.1%. Indexes that strip volatile commodities still exist to get a clearer picture of underlying trends in inflation. Still rising to 4.8%which also shows striking signs of decline, and the reasons for its suppression seem potentially sustainable.
Home price inflation has slowed, which economists have predicted for months and is widely expected to continue. New and used car prices are falling as demand weakens and dealer inventories improve, keeping commodity prices subdued. Service inflation has also slowed slightly, partly due to weak airfares, which may become less important in the coming months.
All of these positive trends could make what Mr. Powell calls the “narrow road” a little wider for soft landings.
For the Fed, an early cooldown could mean it doesn’t need to raise rates as much this year. Central bank officials are poised to raise borrowing costs at next July’s meeting and had expected another rate hike by the end of the year. But if inflation continues its moderate trend in the coming months, it may be possible to slow or even halt that move, while a recovery in inflation could justify further rate hikes. — economists sometimes call this signal the “tightening bias.”
Christopher Waller, one of the Fed’s most inflation-focused members, said last week that he may be in favor of another rate hike at the Fed’s September meeting if inflation numbers hit a high, but two inflation reports ahead. He suggested he might change his mind if progress was shown. Towards a slowdown in price increases.
“If it looks like the past two, the data would probably suggest a stop,” Waller said.
Interest rates are already rising – if they are raised, rates will be in the 5.25-5.5% range As I expected It hit a 16-year high on July 26. Keeping them steady will continue to weigh on the economy and discourage home buyers, car buyers or businesses looking to borrow more money.
But so far, the economy has shown an astonishing capacity to absorb interest rate hikes without cracking. Private consumption has slowed, but not sharply. The interest-rate-sensitive housing market initially cooled sharply after soaring mortgage rates, but has recently shown signs of bottoming out. And the labor market remains strong.
Some economists believe that with such momentum, it will be difficult to fully contain inflation.Wage growth has stagnated about 4.4 percent By common measures, it’s well above the 2-3 percent that was normal in the years before the pandemic.
With salaries rising so quickly, it’s no surprise that companies want to charge more to protect their profits. Consumers earning more money can afford to pay, and inflation will remain higher than usual.
“If the economy doesn’t cool down, companies will need to factor bigger wage increases into their business plans,” said Coco Agbo-Bruer, global research leader at Societe Generale. “It’s not a question of whether the unemployment rate needs to rise. It’s a question of how high the unemployment rate needs to rise to get inflation back to 2%.”
But economists inside the Fed have raised the possibility that the unemployment rate may not need to rise significantly to keep inflation down. Fed economists and Waller said there are plenty of job openings across the economy at the moment, and wage and price growth could slow as job openings decline. claimed in the paper last summer.
The paper argued that the unemployment rate could rise gradually, but not by much, perhaps below 1 percentage point.
So far, that prediction has come true. Job Information I fell. Immigration and rising labor force participation have improved the supply of workers in the economy. Wage growth slowed as the balance restored. Meanwhile, the unemployment rate is hovering at levels similar to when the Fed started raising rates 16 months ago.
The big question is whether the Fed will feel the need to raise rates further, with wage growth (albeit slowing) still significantly faster than before the pandemic. Maybe not.
“It’s very difficult to say that wage growth will lead to lower inflation because wage growth often accompanies inflation,” San Francisco Fed President Mary C. Daly said in an interview with CNBC last week. .
Of course, risks to the outlook still exist. The combined effect of higher interest rates, which weakens growth and employment, could slow the economy even sharper.
The escalation of the Ukraine war and other unforeseen developments could push inflation back into high gear, forcing central bankers to do more to quickly rein in inflation. Alternatively, price increases may simply prove to be painfully stubborn.
“One data point doesn’t make a trend,” Waller said last week. “Inflation slowed briefly in the summer of 2021, but has since worsened.”
But if inflation continues to slow (probably less than 3%, some economists speculate), the authorities will see the cost of curbing inflation and another big one. It may increasingly weigh the goal of fostering a strong job market.
The Fed’s mandate is both price stability and maximum employment, which we call a “dual mandate.” If one goal is really crazy, it takes precedence based on: How the Fed Approaches Policy. But once they both get closer to their goals, pursuing those two is a balancing act.
“I think we need to get two hands on core inflation before we are ready to run two responsibilities in parallel,” said Julia Coronado, economist at Macropolicy Perspectives. Forecasters in a Bloomberg survey expect inflation to fall below 3% (what economists call a “two-handle”) in the spring of 2024.
The Fed may be able to walk a tightrope to a soft landing while preserving the labor market that has benefited so many people. people with disabilities To teenager To black and Hispanic grown ups.
Mr. Powell has always said, “Without price stability, we cannot sustain strong labor market conditions that benefit everyone,” and why the Fed needs to hurt his precious job market. It explains what there is.
But at a press conference in June, he sounded a little more hopeful. And since then, some evidence has emerged to back up his optimism.
“I think the labor market has surprised many, if not all, analysts over the last few years with its extraordinary resilience,” Powell said.
