Can the Fed keep inflation under control without sacrificing jobs?
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The Fed has two jobs. Job one? Maximum employment — getting as many people working as possible. Job two? Keeping inflation low and stable. But as the Fed raises interest rates to tamp down inflation, businesses and consumers spend less. As their customers pull back, employers lay off workers. So, is the Fed neglecting the maximum employment part of its job by raising interest rates, even though that means some people will lose their jobs?
“No, absolutely not,” said Fed Chair Jerome Powell, who was speaking on Wednesday at the Brookings Institution in Washington when I asked him about this. He told me inflation has to be under control for employers to make a profit and hire.
“Without stable prices we can’t have maximum employment,” he said.
But to Kaleb Nygaard, an economic researcher at the University of Pennsylvania, the Fed has to prioritize its inflation fight — even if workers are hurt in the process. Inflation is just more urgent right now. Nygaard said it’s like when one of your kids is sick.
“I had to take one [kid] to the hospital a couple of weeks ago and that kid got a lot more attention that weekend, and rightly so,” he said.
Still, the Fed’s inflation fighting will take a toll. Nygaard calculates that if the size of the labor force stayed the same: more than one and a half million workers would lose their jobs if the unemployment rate rose by a percentage point. Over at Oxford Economics, lead economist Nancy Vanden Houten thinks that number’s a bit high.
“(You know) employers have struggled so to attract and hold onto workers so we think they’re going to be a bit reluctant to lay off workers,” she said.
But other economists are worried the Fed is lavishing too much attention on its inflation fight.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, said if the Fed keeps hiking interest rates aggressively into next year, “we could then end up with an unemployment rate in 2024 or even late next year well above 5%, maybe getting up to 6 or something close to that.”
That would be almost double the unemployment rate at the start of the pandemic.
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