Why the Fed is worried about the strongest US labor market in decades | National policy


WASHINGTON (AP) — President Jerome Powell isn’t as happy with the robust U.S. job market as you might think, and he and the Federal Reserve plan to do something about it: take it down a notch.

On Thursday, Powell described the labor market as “extremely, historically” tight and “unsustainably hot.” Available jobs are near record highs. Wages are rising at their fastest pace in decades. The unemployment rate is flirting with a half-century low and layoffs are rare.

Yet Powell doesn’t see all of this as just cause for celebration. With the highest inflation in four decades hurting households and businesses, the Fed Chairman sees the strength of the labor market as a key driver of the price spike.

But Powell is also betting that this very strength will give the Fed an unusual opportunity to cool the economy and fight inflation without derailing the labor market or triggering a recession. The Fed hopes to reduce the huge number of job offers, rather than stimulate layoffs. Fewer jobs available, in turn, would slow wage increases and help keep inflation in check.

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Thusday, in a round table held by the International Monetary Fund, Powell said the Fed’s goal was to get the labor market to “a better place.”

What’s better than really hot? And what would it mean to get there?

Start with the large number of open jobs – 11.3 million at last count. This is clearly a boon for anyone looking for a better job. For employers, however, all of these openings are a source of continued frustration because a labor shortage has made them difficult to fill.

Soaring job openings are forcing employers to raise wages to attract and keep workers, Powell and the Fed say. These higher labor costs are then passed on to customers in the form of higher prices, helping to fuel inflation.

But this time, with so many jobs open, the Powell Fed thinks most employers will respond by cutting job openings, rather than laying people off. Fewer openings would reduce their need for salary increases and ease inflationary pressures.

If it works – a big if – it would help Powell achieve the elusive “soft landing” that Fed chairs seek when the economy is growing too quickly, but rarely get when inflation is as high as it is now.

Economists are generally skeptical of the Fed’s ability to successfully thread that needle. But given the strength of the job market, they also say it’s a possibility.

“We have enough space to cool off, but not to get cold,” said Claudia Sahm, senior researcher at the Jain Family Institute and former Fed economist.

In his remarks on Thursday, Powell pointed to a key number that underpins the Fed’s approach: there are about 5 million more jobs — including filled and unfilled — than there are. unemployed to fill them. This gap is the largest since World War II, according to economists at Goldman Sachs.

“We have an imbalance between supply and demand in the labor market,” Powell said. “It’s our job to get to a better place where supply and demand are closer together.”

Fed rate hikes aim to achieve this balance. Last month, the central bank raised its short-term key rate for the first time in more than three years, by a modest quarter point, to a range of 0.25% to 0.5%. Economists expect the Fed to raise rates a half point more aggressively at each of its next three meetings. That would equate to the fastest credit crunch since 1994.

The Fed’s decisions have already contributed to higher borrowing costs for home loans, auto loans and credit cards. Those higher costs could slow consumer spending and, the Fed hopes, convince businesses they don’t need to hire as many people.

“The key to a soft landing is to generate a downturn large enough to persuade companies to put some of their expansion plans on hold, but not large enough to trigger deep reductions in current output and employment,” wrote Goldman Sachs economists this week.

At a press conference last month, Powell suggested the labor market had strengthened “to an unhealthy level” and noted that there were about 1.8 jobs available for every unemployed person. If the ratio of job openings to unemployed equaled something closer to 1 to 1, he said, “you’ll have less upward pressure on wages.”

For now, average hourly wages are rising at an annual rate of about 5.5%, the fastest pace in four decades. Economists estimate that if gains slowed to 3% or 4%, it would reduce inflation by about 2 percentage points.

The Fed’s preferred measure of inflation is 6.4%, in part because of supply shocks that have sharply increased the cost of gasoline, food, automobiles and many other goods and components. These increases will not be affected much by the actions of the Fed. Still, many economists expect an easing of supply chain issues to help bring inflation down this year.

As workers change jobs in record numbers, Sahm said some businesses are likely posting additional openings to build up “an inventory of workers” to ensure they can meet customer demand. That might not be necessary if spending slows, she said, making the Fed’s approach workable.

And many employers may be more reluctant to lay off workers after struggling to rehire people after the pandemic recession. The number of laid-off workers receiving unemployment benefits has hit its lowest level since 1970.

“Companies are retaining their workers more than ever,” said Sarah House, an economist at Wells Fargo. “Labour shortages have become a more persistent problem.”

Goldman Sachs has calculated that the gap between the total number of jobs, including openings, and workers, would need to be halved — or 2.5 million — to slow wage increases and inflation. Some of that reduction could come as Americans who had dropped out of the workforce during the pandemic come back and take jobs.

Yet a decline of this magnitude has never happened outside of a recession, Goldman said, or without a sharp rise in unemployment.

Yet Goldman economists put the odds of a recession at only about a third over the next two years.

Ryan Sweet, an economist at Moody’s Analytics, said that with businesses and households in good financial health, with more savings and less overall debt than before the Great Recession of 2008-2009, any economic crisis would likely be brief. .

“If the Fed pushes the economy into recession, it’s likely to be mild,” Sweet said.

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