Federal Reserve Chairman Jerome Powell warned that keeping inflation in check would come with “some pain for households and businesses.” what kind of pain is he talking about?
So far, stock prices have plummeted and borrowing costs for homes, cars, credit card purchases and business investments have risen. But this cost could also include soaring unemployment and all the costs that come with it, which generally hits low-income workers the hardest.
Powell doesn’t say the Fed is trying to put people out of work, but that’s one of the implicit goals of the newly aggressive blitzkrieg of rate hikes. The Fed has raised short-term interest rates by 3 percentage points so far this year, and economists believe it will raise short-term rates by another 1-2 percentage points in the coming months. Higher borrowing costs typically restrain spending, and lower demand lowers inflation.
The Fed believes that a flurry of rate hikes will keep inflation in check without hurting growth enough to trigger a recession. It’s called a “soft landing”. But the Fed could be wrong. Investment giant BlackRock advised in its Sept. 26 market analysis that “this soft landing is not helping us.” “If inflation were to be quelled so quickly, we would be in recession,” he said.
BlackRock believes GDP would need to shrink by about 2 percentage points to bring inflation down as fast as the Fed is targeting. BlackRock estimates that this will put about 3 million Americans out of work. The unemployment rate will rise to about 5.5% from his current 3.7%. As the recession progresses, it will be a mild recession. But should the Fed really put people out of work to keep inflation down?
The Fed has a so-called dual mandate of maximizing employment and stabilizing prices. The Federal Reserve defines price stability as inflation at about 2%. With inflation now at 8.3%, the Fed clearly has some work to do. On the other hand, employment is very strong and many companies are still unable to find enough workers. No one at the Federal Reserve is going to come out and say it, but on its current path, the Federal Reserve is sending the message that keeping prices down is more important than protecting jobs. I’m here.
With inflation at its highest level since then, the Fed is raising rates at the fastest pace since the early 1980s. In the spring of 1980, inflation reached his 14.6%, the highest level in modern history. Under Chairman Paul Volcker, the Fed raised interest rates by about 10% in his 12 months from 1980 to his 1981. A recession ensued and the economy lost his 2.8 million jobs. A small economy at the time pushed the unemployment rate to his 10.8%. That’s much higher than anyone thinks the unemployment rate would fall if his Fed today triggers another recession.
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But that doesn’t mean the Fed-induced recession will work. Wharton University professor Jeremy Siegel has accused the Fed of worrying too much about inflation and not enough about how the recession will hurt ordinary workers. Believing a recession is coming, Tesla CEO Elon Musk tweeted:Siegel is obviously rightDemocratic Senator Elizabeth Warren of Massachusetts warned that the Federal Reserve would “slow down demand by laying off many people and making families poorer.”
Mr. Powell argues that the risk of recession is worth tolerating. He’s not wrong about the troubling effects of lingering inflation well beyond the high gas prices that unnerved motorists over the summer. Worst of all, living standards may fall as prices rise, especially for essential goods, and wages do not keep pace. When the Fed started raising rates in his 1980s, inflation-adjusted real wages were down 6% year-on-year.
That’s a problem now too. Average wages rose by 4.4%, but real wages fell by 3.9% due to inflation of 8.3%. it is unsustainable. But what the Fed should do about it comes down to the whole question of what is causing inflation in the first place.
“I would never say that there are too many people working.”
BlackRock claims that two main factors are driving the price. Labor shortages and a surge in demand for goods during the still unabated COVID pandemic. Other factors, such as the unprecedented fiscal and monetary stimulus of the past two years, are probably less significant factors. The problem, says BlackRock, is that the Fed can’t address either of these two core issues through rate hikes or other tools at its disposal. A recession by definition remains a de facto correction of inflation because it destroys jobs, reduces income, reduces demand for commodities, and lowers prices.
Unemployment can obviously be a detrimental problem for those experiencing it. In addition to the loss of income, unemployment cuts workers out of the labor market and can make it harder to find work even after the recession is over. Some jobs disappear entirely during recessions as employers use layoffs to replace workers with technology. Unemployment insurance and other types of aid can help soften the blow, but the US has a weaker safety net for the unemployed than other developed countries.
Both inflation and unemployment hit low-income workers harder than wealthy workers. Low-income workers simply lack the cushion to absorb price increases or ride out unemployment comfortably. Inflation will slowly get worse over time. Unemployment hits hard, immediately and for as long as it lasts. Choosing one form of pain over another is Hobson’s choice.
Even Chairman Powell has begun to hint that a recession and millions of jobs may be needed to bring inflation down to acceptable levels. The Federal Reserve’s own projections see the unemployment rate rise to his 4.4% over the next 12 months, which equates to about 1.3 million job losses.
Powell said euphemistically after the Fed’s last meeting on Sept. 22, “I think we need to ease the labor market situation.” from inflation. ” And soon, out of unemployment.
Rick Newman Yahoo FinanceFollow him on Twitter. @rickjnewman
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