This is how the Fed raises interest rates for Americans 2:00 (CNN Business) –– In its efforts to reduce historical inflation and cool down the economy, the US Federal Reserve (Fed) has used various euphemisms to describe the potential impact on jobs in the country. From economic “pain” to “unfortunate costs” to a “labour market moderation.” The data, however, does not beat around the bush. The Fed published this Wednesday, along with the third consecutive large increase of 75 basis points in interest rates, its most recent economic projections. The numbers show that the central bank expects the US unemployment rate to rise to 4.4% next year and possibly hit 5%, which contrasts with the 3.7% figure, which was projected in last august. Assuming no change in the labor force, that means about 1.2 million more people would be unemployed. For the upper end of the Fed’s range, 5%, the amount would rise to 2.2 million. “There is a gradual realization that the rosy prospect of being able to reduce labor market rigidity simply by decreasing the number of job openings has disappeared,” said Gregory Daco, chief economist at EY-Parthenon. “We now realize implicitly that to cool down the labor market you need a significant increase in the unemployment rate and you need a brake on job growth with potential job losses,” he added. During the first eight months of 2022, the United States has recorded an average net gain of 438,000 jobs each month, according to data from the Bureau of Labor Statistics (BLS). In August, 315,000 jobs were added. Before the pandemic, the US averaged fewer than 200,000 new jobs a month. Now, those numbers could drop relatively quickly, Daco noted. “I would not be surprised if in an environment where companies are more cautious and more discretionary in their hiring decisions, we could see potential net job losses by the end of the year,” he noted. Job seekers visit the Spring Job Fair at the Las Vegas Convention Center. The strength of the labor market is expected to continue to moderate in the coming months, Ataman Ozyildirim, Senior Director of Economics at The Conference Board, said Wednesday in the most recent publication of the Leading Economic Index carried out by this think tank. The August 2022 index posted a decline for the sixth consecutive month, which could indicate a recession is imminent, according to The Conference Board. “The average workweek in manufacturing has shrunk in four of the last six months, a salient sign, as companies cut hours before downsizing their workforce,” Ozyildirim said in a statement. “Economic activity will continue to slow more broadly across the US economy and is likely to contract. An important factor in this slowdown has been the Federal Reserve’s rapid tightening of monetary policy to counter inflationary pressures”. Countless Factors at Play IMF Director Calls for Interest Rate Hike 1:14 Still, this isn’t a typical episode of high inflation or a typical job market, said Robert Frick, corporate economist at Navy Federal Credit Union. The pandemic has shaken the labor market and hit supply chains to the point that, more than two years later, many of those challenges still persist, while new ones have been added. Among them, the increase in food and energy prices, as a result of highly volatile events such as Russia’s war in Ukraine and extreme weather events. The Fed can’t just “snap its fingers three times, raise interest rates and make inflation go down,” Frick said. “There are countless factors that are going on right now, and it’s a mistake to think that the Fed controls more than a handful of them,” he said. However, the Federal Reserve can influence demand, with higher interest rates spreading to various areas of the economy. For example, by making it harder to buy a home, more expensive to buy a car or finance a business, and making credit card balances much more expensive. Although parts of demand in the economy are already showing some slowdown in response to the Fed’s moves, the labor market has remained an outlier. Unemployment remains near historically low levels, job openings double the number of job seekers, and labor force participation remains below pre-pandemic levels. “I think the Fed is wrong if it thinks that raising rates, even to 4% or higher, is going to cower the labor market, because we are still more than 4 million jobs below the pre-pandemic trend. And employers are still making money, and they still have to hire people,” Frick said. “It’s really, at this point, like telling the tide not to come in, expecting the labor market to weaken.” A key reason Fed Chairman Jerome Powell wants more flexibility in the labor market stems from concerns that an employee shortage will continue to push up wages. A factor that could keep inflation high. As the unemployment rate rises, workers lose bargaining power for higher wages and households cut back on spending. “Powell has said that wage increases that fuel inflation are yet to come, but he expects them to happen in the future,” Frick said. “This is all very theoretical at this point. And I understand that if you want to decrease demand, one way to do that is to increase unemployment… But I really think it’s an open question whether it’s an issue now or not.” There is no “painless” path Mortgage rates rise in the US 1:11 In that sense, US workers may be bearing the brunt of a problem they didn’t cause. Powell and the Fed have earned plenty of critics on this front, especially Massachusetts Democratic Sen. Elizabeth Warren, who tweeted Wednesday that she “has been warning that Chairman Powell’s Fed would put millions of Americans out of work. I’m afraid he’s already well on his way to doing it.” “It’s unfair,” Frick said. “But no one said the economy wasn’t cruel sometimes.” Powell has warned that a prolonged and entrenched high inflation would be even worse than some moderate increases in the unemployment rate. The Fed’s latest economic projections point to GDP growth slowing from 1.7% to 0.2% by the end of this year. “That’s a very slow level of growth and it could cause increases in unemployment. But that’s something I think we need to have,” Powell said. “We believe that we should also have softer labor market conditions. 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 with them is that they are really suffering from inflation. “. “If we want to establish ourselves, light the way into another period of a very strong job market, we have to put inflation behind us. I wish there was a way to do it that wasn’t painful. There isn’t,” he added. . The next key employment data, including job vacancies, layoffs and monthly job earnings, will be known in the first week of October, when the Bureau of Labor Statistics releases the Job Vacancies and Turnover Survey and monthly employment report. of September. Jobless claims data released Thursday showed the number of initial jobless claims was 213,000, for the week ending Sept. 17, according to the Labor Department. The previous week’s total of 213,000 was revised down by 5,000. Weekly claims, which remain near some of their lowest levels in months, underscore how employers are holding on tight to workers as the job market remains brimming with opportunities for job seekers.
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