The intense labor market has been a major driver of inflation over the past year. But what will the Fed's bid to soften the job market mean for businesses?
The Federal Reserve’s interest rate hikes to tame high inflation are increasingly looking to change one particular sector of the economy — the roaring job market.stated that while the economy has slowed from its 2021 pandemic highs and higher interest rates have weakened the housing market and slowed business investment, the labor market has continued to stay strong.
“Despite the slowdown in growth, the labor market has remained extremely tight, with the unemployment rate near a 50-year low, job vacancies near historical highs and wage growth elevated,” Powell said."The labor market continues to be out of balance, with demand for workers substantially exceeding the supply of available workers.” Powell noted employment has risen by an average of 378,000 jobs per month over the past three months. While the labor force participation rate showed what Powell called a “welcome uptick” in August, it has remained largely unchanged since the beginning of 2022. "So how do we get rid of inflation? And as I mentioned, it would be nice if there were a way to just wish it away but there isn't. We have to get supply and demand back into alignment and the way we do that is by slowing the economy," he said."Hopefully we do that by slowing the economy and we see some softening of labor market conditions, and we see a big contribution from supply side improvements and things like that." Powell said the Fed's projections show supply and demand in the labor market to “come into better balance” over time, easing the pressure on wages and prices. That translates into unemployment rising from 3.7% to 4.4% by the end of 2023. That means 1.5 million more Americans out of work. Richard Gardner, CEO of fintech firm Modulus, said the goal of the rate hikes was to tamp down a tight labor market and bring it back in line with historical numbers. “While he mentioned that unemployment may not go as high as in previous inflation-reduction cycles, the goal is still to bring down the number of job openings,” Garner said. “With a weaker labor market, demand will be pushed downward across the board, so the rate hike makes sense in the fight against stubbornly high inflation.” Garner’s issue with the fed hikes is that the Federal Reserve is not doing them fast enough, which only serves to draw out any economic pain for longer than it needs to be. But Treasury Secretary Janet Yellen has tried to thread the needle, saying at a recent event that the United States can have both low inflation and a strong job market. "I believe there is a path through this that can succeed in bringing down inflation while also maintaining a strong labor market," Yellen said at the Atlantic Festival in WashingtonEconomists have told The Playbook it would take significant time and a deep downturn to disrupt the dynamics of the labor market — given
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