The Federal Reserve’s efforts to slow the economy and bring inflation under control are often likened to airplane descents, which can lead to soft landings, bumpy landings, or complete crashes. can be
Fed Chairman Jerome H. Powell is betting on something more akin to the miracle on the Hudson River — a gentle touchdown all things considered and unlike anything the country has seen before.
The Federal Reserve (Fed) has sharply raised interest rates over the past year, hitting just above 5% on Wednesday. This is to cool the economy and control inflation. Central bank staff economists have begun to predict that the United States will likely slip into a recession later this year as the Fed’s substantive policy move combined with disruptions in the banking sector wipe out growth.
But Powell made it clear at a press conference on Wednesday that he disagrees.
“It’s not my own most likely case,” he said, explaining that he expects modest growth this year. increase.
The US job market remains very strong, with rapid job growth and unemployment hovering near It’s the lowest level in 50 years, but it’s showing signs of cooling off. The number of vacancies has dropped sharply in recent months, 9.6 million in March From a peak of over 12 million a year ago. Historically, such a large reduction in the number of available positions would have accompanied layoffs and rising unemployment rates. A prominent economist predicted A painful economic landing for that very reason.
But so far, the unemployment rate has not fallen.
“Unless the unemployment rate goes up, it’s not going to go as low as job openings,” Mr. Powell said this week. America will have an update on unemployment when the job market report comes out on Friday, but the unemployment rate has yet to rise significantly.
Mr. Powell added: ”
The fate of the U.S. economy depends on whether Mr. Powell’s optimism is correct. If the Fed can pull it off — defying history and curbing rapid inflation by cooling the labor market sharply without causing a large and painful spike in unemployment — the post-pandemic economic legacy will be turbulent. , but could ultimately turn out to be a positive one. Failing that, holding back price increases could come at a painful price for U.S. employees.
Some economists are skeptical that the good times will last.
Aysegul Sahin, an economist at the University of Texas at Austin, said: However, she noted that her productivity data looked bleak. This suggests that companies have struggled with years of pandemic labor shortages and are clinging to workers even when they aren’t necessarily needed to produce goods and services.
“This time it was different, but now we are getting back to what is a more normal labor market,” she said. “This will start unfolding as usual.”
The Federal Reserve is responsible for maximizing employment and promoting stable inflation. However, as now, these goals can conflict.
Inflation has been above the Fed’s 2% target for two full years. A strong labor market did not trigger the initial spike in prices, but could help sustain it. Employers are paying higher wages to hold onto workers. As they do so, they are increasing their prices to cover the costs. Workers who earn a little more can pay rising rent, child support and restaurant checks without lowering them.
In such a situation, the Fed will raise interest rates to cool the economy and job market. Rising borrowing costs will slow down the housing market, discourage large consumer purchases such as cars and home improvement projects, and hinder business expansion. As people spend less, businesses can’t keep raising prices without losing customers.
But getting policy right is an economic tightrope walk.
Policy makers believe it is of the utmost importance to act decisively to quickly contain inflation. If inflation persists, families and businesses may come to expect prices to rise steadily. It may then adjust its behavior to demand larger price increases and normalize periodic price increases. That would make it even harder to eradicate inflation.
On the other hand, officials don’t want to cool the economy too much, causing a harsher recession than necessary to bring inflation back to normal.
Striking that balance is a dangerous proposition. It’s not clear exactly how much the economy will need to slow down to completely curb inflation. Also, the Fed’s rate policy is blunt, imprecise, and slow to work. It’s hard to predict how much further rate hikes will ultimately weigh on growth.
That’s why the Fed has been slow to change policy in recent months. After last year’s series of three-quarter point rate movements, the Fed recently adjusted its borrowing cost by one-quarter point at a time. Officials hinted this week that future economic data could allow the central bank to halt rate hikes altogether as soon as it meets in mid-June.
A moratorium would give the central bank an opportunity to see if the interest rate adjustments so far have been sufficient.
It also gives us time to assess the impact of disruptions in the banking industry. This could make the economy’s soft landing even more difficult.
Since mid-March, three major banks have failed, requiring government intervention. Uncertainties continue to mount among mid-sized lenders as several regional bank stocks plunged on Wednesday and Thursday. Bank troubles can quickly turn into financial problems. When lenders pull out, businesses can’t grow and families can’t finance their spending.
Nick Bunker, director of North American economic research at job site Indeed, said the labor market could suffer an even more dramatic slowdown given the turmoil in banks and the Fed’s past interest rate movements.
Job openings are declining rapidly, but some of that may reflect a return to normal after a string of pandemic-inspired oddities, not necessarily as a result of Fed policy. There is
For example, jobs in the leisure and hospitality industries have surged as restaurants and hotels have reopened from lockdowns. They were gone now, but it may be about returning to normal business.
“We’re doing soft landings, but how much of that is gravity and how much are pilots doing in planes?” Bunker said. Going forward, when policy starts to eat in, the usual historical relationship between declining job openings and rising unemployment may begin.
Or, as Mr. Powell hopes, this time may be truly unique. Bunker said the Fed’s and the U.S. economy’s ability to validate their claims would depend on whether problems in the banking system were resolved.
“If the financial sector comes and turns the tables, we may not have the answer,” he said.
