Jerome H. has spent Powell, chairman of the Federal Reserve, saw the early pandemic as he lamented something America lost: a job market so historically strong that it boosted marginalized groups, giving opportunity to people and communities who have lived too long without them.
“We are very anxious to get back into the economy, back to a tight labor market with low unemployment, high labor force participation, higher wages — all the good factors that we had last winter,” Powell said in a statement. NPR interview in September 2020.
The Chairman of the Federal Reserve got that wish. The job market has rebounded by nearly every major metric, and employment rate For people in their most active working year, they have passed the highs of 2019, reaching a level last seen in April 2001.
However, one of the biggest risks to this strong recovery has been Powell’s own Fed. Economists spent months predicting that workers would not be able to hold on to all of their recent gains in the labor market because the Fed was aggressively attacking rapid inflation. The central bank sharply raised interest rates to cool the economy and the labor market, a campaign that many economists predicted could push unemployment higher and even plunge America into recession.
But now a tantalizing possibility is emerging: Can America tame inflation and preserve its gains in the labor market?
Last week’s data showed that price increases have begun to ease off in earnest, and this trend is expected to continue in the coming months. The long-awaited cooling has occurred even as unemployment remains at rock bottom and employment remains healthy. The combination raises the possibility – still not guaranteed – that a Powell-run central bank could backtrack, with workers largely keeping their jobs and growth slowly turning even as inflation returns to normal.
“There are meaningful reasons why inflation has fallen, and why we expect to see a further decline,” said Julia Pollack, chief economist at ZipRecruiter. “Many economists argue that the last inclination to bring down inflation will be the hardest, but that is not necessarily the case.”
Inflation has fallen to 3 percent, a third of its peak of 9.1 percent last summer. While still the indicator that removes volatile products to give a cleaner sense of the underlying trend of inflation 4.8 percent highertoo, is showing noticeable signs of going down—and the reasons for this moderation appear to be sustainable.
Housing costs are slowing inflationary measures, something economists have been anticipating for months and widely expect will continue. New and used car prices drop as demand subsides and inventories improve at many dealerships, allowing for merchandise prices to moderate. Even service inflation has subsided somewhat, although some of that is due to a slowdown in airfares that may seem less significant in the coming months.
All of these positive trends could make the path to the soft landing — what Mr. Powell called the “narrow path” — a little wider.
For the Federal Reserve, the nascent calm may mean that it does not have to raise interest rates as much this year. Central bankers are preparing to raise borrowing costs at their July meeting next week and had expected another rate hike before the end of the year. But if inflation continues to moderate for the next few months, it could allow them to delay or even reject the move, suggesting that further increases might be warranted if inflation picks up again — a signal that economists sometimes call a “tightening bias.”
Christopher Waller, one of the Fed’s most inflation-focused members, suggested last week that while he might favor raising interest rates again at the September Fed meeting if inflation data is hot, he might change his mind if two upcoming inflation reports show progress. . Towards slower price increases.
“If they look like the last two, then the data indicates the possibility of stopping,” Mr. Waller said.
Interest rates are already high – they would be in the 5.25 to 5.5 percent range if they were raised As expected on July 26, the highest level in 16 years. Keeping them steady will continue to burden the economy, discouraging homebuyers, car shoppers or businesses hoping to expand with borrowed money.
So far, though, the economy has shown an amazing ability to absorb high interest rates without crashing. Consumer spending has slowed, but not decreased. The interest rate-sensitive housing market experienced a sharp cold snap initially as mortgage rates soared, but has recently shown signs of recovery. And the job market continues.
Some economists believe that with this much momentum, eliminating inflation entirely will be difficult. Wage growth is hovering about 4.4 percent By a popular measure, well above the 2 to 3 percent that was normal in the years before the pandemic.
With wages rising rapidly, the logic goes, companies will try to charge more to protect their profits. Consumers who earn more will have enough money to pay, making inflation hotter than usual.
“If the economy does not calm down, companies will need to factor larger wage increases into their business plans,” said Koko Agbo-Blois, global research lead at Société Générale. “It’s not a question of whether unemployment needs to go up — it’s a question of how high unemployment rates have to go in order for inflation to return to 2 percent.”
Still, economists within the Fed itself have raised the possibility that unemployment may not need to rise much at all to bring down inflation. There are plenty of jobs across the economy right now, and wage and price growth may be able to slow as these jobs decline, according to a Federal Reserve economist, Mr. Waller. argued in paper last summer.
And while unemployment could creep up, the paper argued, it might not rise by much: perhaps 1 percentage point or less.
To date, this prediction persists. Jobs chances decreased. Immigration and increased participation in the labor force have improved the supply of workers in the economy. As equilibrium returned, wage growth slowed. Unemployment, meanwhile, is hovering at a level similar to when the Fed started raising interest rates 16 months ago.
The big question is whether the Fed will feel the need to raise interest rates further in a world where wage gains – while slowing – remain significantly faster than they were before the pandemic. It is possible that they did not.
“Wage growth often follows inflation, so it’s really hard to say that wage growth will lead to lower inflation,” Mary C. Daley, President of the Federal Reserve Bank of San Francisco, said during an interview with CNBC last week.
Risks to the outlook still loom, of course. The economy could still slow more sharply as the effects of higher interest rates intensify, lowering growth and employment.
Inflation could come back in force due to an escalation of the war in Ukraine or some other unexpected development, prompting central bankers to do more to ensure that price increases are brought under control quickly. Or, price increases may simply prove excruciatingly stubborn.
“One data point does not constitute a trend,” Mr. Waller said last week. “Inflation slowed briefly in the summer of 2021 before getting worse.”
But if price increases continue to slow — perhaps to less than 3 percent, as some economists have predicted — officials may increasingly weigh the cost of cutting price increases against their other big goal: fostering a strong labor market.
The tasks of the Federal Reserve are to stabilize prices and provide maximum employment opportunities, which is called the “double mandate”. When one goal is really out of the game, it takes precedence, based on The way the Fed handles politics. But once they are close to the goal, the pursuit of the two is a balancing act.
“I think we need to deal with core inflation before they are ready to put the dual mandates side by side,” said Julia Coronado, economist at MacroPolicy Perspectives. Forecasters in a Bloomberg survey expect the measure of inflation to fall below 3 percent — what economists call a “2 handle” — in the spring of 2024.
The Fed may be able to walk this tightrope to the soft landing, and hold a job market that has benefited a group of people – from these people with disabilities to teens to black And Hispanic grown ups.
Mr. Powell has regularly said that “without price stability, we will not achieve a sustainable period of strong labor market conditions that benefit everyone,” explaining why the Fed may need to hurt its precious labor market.
But at his press conference in June, he sounded more optimistic — and since then, evidence has emerged that reinforces that optimism.
“I think the job market has surprised many, if not all, analysts over the past couple of years with its extraordinary resilience,” Powell said.
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