Fed bets on strong jobs market to keep US out of recession

The Federal Reserve is worried a tight labor market might fuel high inflation, but it is also betting on the strong demand for labor to keep the economy out of recession. A bevy of top Fed officials, including Chairman Jerome Powell, say businesses are leery of cutting jobs. Many companies have struggled to hire people in the past few years due to the worst labor shortage in decades. “The reports that we get from the field are that companies are very reluctant to lay people off. Generally companies want to hold onto the workers they have because it’s been very, very hard to hire,” Powell said on Wednesday after the Fed raised interest rates again. “We need more people,” he added. The robust demand for labor explains why the Fed has forecast the unemployment rate to rise to a peak of just 4.6% in 2023 even as rising interest rates throttle the economy. The current jobless rate stands near a half-century low of 3.7%. If most Americans remained employed, they’ll also likely be able to spend enough to keep the economy out of decline. Consumer spending is by far the biggest driver of economic growth. The critical role of consumer spending underpins the Fed’s forecast that the economy will continue to expand in 2023 and avert a downturn. The central bank estimates the US will grow 0.5% next year. History is not on the side of the Fed, analysts point out. “The expected increase in the unemployment rate between this year and next has never happened without the economy falling into a recession,” noted chief economist Ryan Sweet of Oxford Economics. See also: How the Fed’s latest interest-rate hike affects your mortgage, car loan and credit-card bill — but there’s good news for your savings Yet the pandemic had rendered old patterns of the economy less predictable, other say. And a 4.6% jobless rate is still exceedingly low by any measure. The flip side of a vibrant labor market, however, is upward pressure on wages as companies compete to hire and retain employees. The intense competition for labor has caused a record number of Americans to quit one job for another—more than 4 million a month. It’s also driven up the cost of labor, the single biggest expense for most businesses, to a 40-year high of more than 5% a year. That’s the chief reason why the Fed worries high inflation might not be so easy to tame. The bank raised its inflation forecasts for the next three years and does not expect inflation to return to its 2% target until at least 2026. If workers think inflation will stay high, Fed officials reason, it could cause them to demand ever-rising and triggers an inflationary debacle wage known as a wage-price spiral. The nightmare scenario is why the Fed is rapidly raising interest rates. The central bank aims to slow down the demand for goods and services enough to reduce the appetite for labor and rein in wage increases. Instead of unemployment surging, as is normally the case, Powell and his allies at the Fed believe they can ease the labor crunch mainly by reducing a near-record number of job openings. Companies might be content enough, the thinking goes, to retain most of their current employees and not go looking for new ones so long as the economy doesn’t crater. Is it a doable strategy? Many Wall Street DJIA, -0.85% economists are skeptical. They predict the jobless rate will top 5% next year or go even higher if the Fed stays on track to keep raising interest rates. Several Fed officials also predicted a recession in 2023 for the first time, and most indicated the risks to the economy were still quite high, based on their forecasts for next year. “Officials implicitly acknowledged that their relatively optimistic forecast scenario may be too good to be true,” said chief economist Stephen Stanley of Amherst Pierpont Securities.

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