Howard Schneider
Jackson Hole, Wyoming. (Reuters) – In 2019, the U.S. unemployment rate averaged 3.7% and consumer prices rose at an annual rate of about 1.8%.
Fast forward to 2022 while unemployment averaged 3.7% for the first time in seven months of the year and prices rose by more than 8% per year The rate of growth has skyrocketed – which has sparked a potentially heated debate at the Fed over whether to adopt “hot” labor market policies before COVID – 20 Pandemics can survival in emerging economies.
U.S. central bankers admit their fight to rein in raging inflation could lead to job losses as rising interest rates slow the economy and companies realign their staffing plans in response, though Whether the unemployment will be mild or massive is unknown.
More controversial: Are the tight job market and high inflation a coincidence of the pandemic or a sign of fundamental changes in the workforce and economy, meaning that efforts to control inflation may take longer than Previously higher unemployment.
This is a controversial issue. When IMF First Deputy Managing Director Gita Gopinath said at this year’s Jackson Hole central bank meeting that there was a risk of rising prices from the red-hot labor market policy, it was quickly met with resistance.
Minneapolis Fed President Neil Kashkari said the U.S. job market today is “not hot. It’s a raging fire,” arguing that efforts to curb imbalances have not That doesn’t mean officials need to abandon monetary policy designed to lure more workers into the job market forever. labor force and push the unemployment rate down.
St. St. Louis Fed President James Bullard countered that the Fed should be cautious in assuming that indicators such as the labor force participation rate should always move higher.
“People do value leisure and you want them to make the right tradeoffs,” he said.
It is an open question whether these preferences have changed in the wake of the pandemic.
There is growing evidence that they do. Retirement numbers are up, and while some retirees are returning to work, not all are. The labor force participation rate for young workers is also below pre-pandemic levels.
Recent research shows that the amount of time people want to work has also declined.
This means the economy may still be labor constrained, wage pressures persist, and for any given unemployment rate, there may be less labor available than the headline numbers suggest.
For the current inflation debate, this could mean that policymakers will have to accept a relatively large increase in unemployment if they want to reduce the rate of price increases. The 4% rate is in line with the central bank’s 2% inflation target. Unemployment is seen as part of the inflation war, but will only gradually increase to 3.7% by the end of this year, 3.9% next year, 2019 4.1% – effectively a “soft response” 40 Highest inflation and most aggressive interest rate growth in years, a landing in the job market”.
Many analysts see this outlook as overly optimistic and argue that the Fed will need to create more economic slack — falling demand and slower growth — to respond to prices necessary. That could mean wider unemployment.
‘A bit premature’
The Labor Department will release its August jobs report on Friday, with economists polled by Reuters forecasting the unemployment rate to remain at 3.5% constant. In less than three weeks, Fed policymakers will release their September 20-20 New Economic Forecast meeting.
One estimate by economists at the San Francisco Fed sees unemployment consistent with lower inflation in the near term, as high as 6%. This would mean that about 4 million people would lose their jobs.
“Economic dislocation appears to have pushed up short-term non-inflation rates substantially,” the study concluded.
There is an opposite theory. If inflation is not driven by a scarcity of resources, including labor, but more by recent global supply issues or public expectations, it may be contained with minimal job losses.
The case has been debated by Fed Governor Christopher Waller. In a recent paper, he concluded that a shift in the relationship between job openings and unemployment could mean a drop in job openings could significantly ease pressures on the labor market — a point that former U.S. Treasury Secretary Lawrence Summers said.
Federal Reserve Chairman Jerome Powell, in his keynote speech at the Jackson Hole, Wyoming conference on Friday, insisted on the euphemism that “labor market conditions have improved easing,” as he promised to fight inflation.
Cleveland Fed President Loretta Mester said in an interview with Reuters that the unemployment rate may only need to rise to 4. 25%.
“I don’t think anyone has a very accurate picture of where sustainable unemployment is right now,” she said on the sidelines of Saturday’s Jackson Hole meeting. If it was wide before, it is wider now because of the changing nature of work… but it is too early to say we have to get unemployment to 6%. This is not in my forecast.
The Fed also has a longer-term perspective. Under Powell, the Fed has acknowledged that it has sometimes exaggerated inflation risks in the past and has maintained an overly restrictive monetary policy at the expense of unnecessary job losses.
To avoid this mistake, the Federal Reserve has adopted a new strategy at 2020, promising a “job shortage from the highest level. “In practice, this means that looser policy risks greater inflation in favor of boosting employment—a very hot labor market strategy that Gopinath has warned about.
A then-there The feeling is that unemployment consistent with low inflation is already well below Fed estimates, and ignoring this to chase illusory inflation will fuel unnecessary unemployment.
The open question now is whether the so-called “natural” unemployment rate will rise temporarily or permanently, and the trade-off between inflation and unemployment – considered no longer a concern – will now constrain policymakers Long-term demographics reduce labor force participation, said Janis Eberly, an economist at Northwestern University (NASDAQ: NWE). No one really wants to be confident about what the unemployment rate will look like in the long run. ”
