Federal Reserve predicts a worsening economy

Federal Reserve predicts a worsening economy

The Federal Reserve has a warning for Americans: The U.S. economy is about to get much worse. As if it weren’t already painful enough.

When the Federal Reserve predicted that its benchmark rate would reach 4.4% by the end of the year, even if it caused a recession, Fed Chair Jerome Powell made that quite apparent last week.

Powell predicted a possible deterioration of labor market conditions in his economic outlook on September 21. “We’ll keep working until we’re sure the project is finished,”

That just indicates that there is unemployment. According to the Fed, the unemployment rate would increase to 4.4% from 3.7% now by the end of the year, which would mean an extra 1.2 million people would lose their jobs.

Powell remarked, “I wish there were a painless way to accomplish it. There is not,

Hurt so badly?

The rationale behind why raising unemployment might reduce inflation is as follows. The newly jobless and their families would drastically cut down on spending if another million or two people lost their jobs, while pay growth for the majority of those remaining in the workforce would stagnate.

According to the notion, businesses will cease raising prices if they believe that labor expenses won’t increase. Consequently, the rate of price rise is slowed.

Susan Collins, president of the Federal Reserve Bank of Boston, stated in a speech on Monday that “I do believe that achieving price stability would require slower job growth and a slightly higher unemployment rate.” “And I take very seriously the fact that unemployment hurts and that its effects have been disproportionately concentrated among historically excluded communities,” she said.

But other economists wonder whether squeezing the labor market is really essential to control inflation.

“It is obvious that the Fed wants the labor market to deteriorate considerably. We’re not sure why, but “According to a study by Pantheon Macroeconomics’ Ian Shepherdson, chief economist. He projected that once supply chains recover, inflation would “plunge” in 2019.

The Federal Reserve is concerned about a situation known as a wage-price spiral, in which employees demand ever-higher wages to keep up with inflation and businesses transfer those increased labor expenses onto customers.

But academics don’t all believe that today’s explosive inflation is primarily being caused by salaries. Even while worker compensation has increased by an average of 5.5% over the last year, price increases have outpaced it.

According to a tweet by former Fed economist Claudia Sahm, supply-chain difficulties are to blame for at least half of the current inflation.

Sahm remarked that lower-paid employees today have benefited most from pay rises and have suffered most from inflation, despite the fact that increasing spending by wealthier families rather than those at the bottom of the economic ladder is what is causing the inflation.

losing jobs and rising rates

Economics is considerably more certain about how boosting interest rates causes individuals to lose their jobs, even if the precise link between wages and inflation is still up for discussion.

According to Josh Bivens, research director at the Economic Policy Institute, when rates increase, “Any consumer item that people take on loan to purchase, whether it’s vehicles or washing machines — becomes more costly.”

Less employment and ultimately layoffs follow for those who manufacture such automobiles and washing machines. The building, house sales, and mortgage refinancing sectors of the economy, which are susceptible to interest rates, also experience slowdowns, which have an impact on employment there.

Additionally, fewer people are traveling, so hotels are having to cut down on employees to make up for the decline in occupancy. When borrowing rates are high, businesses intending to expand—like a coffee shop chain adding a new branch—are more reluctant to do so. These hotels and restaurants will have fewer patrons to service and ultimately reduce personnel as consumers spend less on vacation, eating out, and entertainment.

According to Peter Boockvar, chief investment officer of the Bleakley Financial Group, “in the service sector, labor is the main component of your cost structure, so if you’re seeking to reduce expenses, that’s where you’ll go first.”

Although Boockvar believes that raising rates is necessary, he finds the Fed’s strategies to be aggressive. I just object to the [Fed’s] speed and scope, he said. They’re gaining momentum so quickly and strongly that I’m concerned the market and economy won’t be able to take it.

Yes, low-wage employees suffer the most from high inflation since they are least able to absorb price increases, as noted by Powell in his case for raising interest rates. But according to Dean Baker, co-director of the Center for Economic and Policy Research, raising rates won’t deal with the problems that have the most impact on working-class budgets, particularly food and energy.

The price of wheat or oil won’t be much affected by the Fed raising interest rates, unless other central banks follow suit and do the same, which would limit development abroad, Baker tweeted on Tuesday.

“Contrarily, it seems unlikely that those in low-paying occupations would be the ones who experience unemployment or decreased pay as a consequence of the Fed’s interest rate increases. Instead of physicians, attorneys, or economists, it will be shop clerks, restaurant staff, and manufacturing people who lose their employment.”

Future layoffs

Oxford Economics forecasts that the current rate rises by the Fed will result in the loss of 800,000 jobs.

According to Nancy Vanden Houten, Oxford’s top U.S. economist, “When we look towards 2023, we expect essentially no net hiring in the first quarter and employment losses of over 800,000 or 900,000 in the second and third quarter combined.”

Some see an even more difficult landing; Bank of America anticipates a peak unemployment rate of 5.6% in 2019. That would result in 3.2 million more people losing their jobs than they do now.

Senator Elizabeth Warren and Sahm both criticized the Fed’s aggressive rate rise plans as “would put millions of Americans out of work” and “inexcusable, verging on deadly,” respectively.

Many others are wondering how much of the agony Powell predicted is really required.

“If we genuinely see a recession, inflation will decline much more quickly. However, the price for it will be significantly higher “said Bivens.

According to Bivens, there is risk since the Fed may have started a runaway train. It is difficult to halt the significant rise in unemployment once it has begun. The number of unemployed people may not abruptly stop climbing at the Fed experts’ predicted pace of 4.4%, but instead may continue to rise.

This notion that the Fed can simply crank up the inflation dial while leaving everything else alone is false, according to Bivens.

“We are now pointing the aircraft towards the ground very aggressively and pumping the accelerator,” Bivens said, “instead of the smooth landing for the economy that the Fed claims it is looking for.”

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