International Forecaster Weekly

Fed Tightening to Get to 2% Inflation Could Add 9 Million to Jobless Rolls

Critics, second guessers and Monday morning quarterbacks are speaking out en masse since the Fed’s 50 basis point rate hike on Wednesday.

In perusing mainstream headlines and articles since then, I’ve found that 9.5 out of 10 of op-ed writers, economists and other pundits believe that Chair Jerome Powell and his policymaking colleagues are on the verge of sending the economy into a recession.

They say, no ifs, ands or buts about it. The only question is, How deep and prolonged will the downturn and resulting pain be? In other words, forget about any soft landing.

The consensus of the naysayers is that the Fed started their quantitative tightening too little, too late. This side also argues that:

(1)  The Fed’s projection of last year’s inflation surge being transitory was naïve (at best) and potentially catastrophic (at worst); and

(2)  As a result, they kept interest rates too low for too long and kept buying Treasuries and mortgage-backed securities when they should have stopped that much earlier.

Guest Writer | December 16, 2022

By Dave Allen for Discount Gold & Silver

Critics, second guessers and Monday morning quarterbacks are speaking out en masse since the Fed’s 50 basis point rate hike on Wednesday.

In perusing mainstream headlines and articles since then, I’ve found that 9.5 out of 10 of op-ed writers, economists and other pundits believe that Chair Jerome Powell and his policymaking colleagues are on the verge of sending the economy into a recession.

They say, no ifs, ands or buts about it. The only question is, How deep and prolonged will the downturn and resulting pain be? In other words, forget about any soft landing.

The consensus of the naysayers is that the Fed started their quantitative tightening too little, too late. This side also argues that:

(1)  The Fed’s projection of last year’s inflation surge being transitory was naïve (at best) and potentially catastrophic (at worst); and

(2)  As a result, they kept interest rates too low for too long and kept buying Treasuries and mortgage-backed securities when they should have stopped that much earlier.

And That’s Just the Start 

After Wednesday’s rate hike, Powell said that more hikes were likely coming in the new year, reiterating that the Fed would continue their tightening as long as it was needed to hit its inflation goal.

Most economists agree that getting close to, much less hitting, that goal (2%) isn’t going to happen anytime soon, at least not without sending the unemployment rate to record highs.

Even American consumers are deeply skeptical. The latest NYFed Survey of Consumer Expectations shows that households see inflation falling to 5.2% by the end of 2023.

Even by the end of 2025, they see inflation at 3.0%. It’s only after 5 years that they believe inflation will fall closer to the 2% goal (at 2.3%).

Who knows where the overall economy, especially joblessness, would be under those latter two scenarios?

Even getting inflation to 5.2% from its current level of 7.1% is likely to hit the job market more harshly than the Fed believes.

Look, unemployment is not anywhere close to 3.5, 3.6 or 3.7%, like the Labor Department, members of Congress, the White House and the mainstream media want us to believe (the so-called U-3 – or “headline” rate).

When you add shorter-term discouraged workers and those working part-time for economic reasons, the jobless rate is 6.7% – according to the government’s U-6 rate.

Other analysts, like ShadowStats’ John Williams, believe it’s closer to 24% when you include long-term discouraged job seekers, who Williams says “were officially defined out of official existence in 1994.”

However you look at it, Powell said at his press conference this week, "Changing our inflation goal is just something we're not thinking about, and it's not something we're going to think about. This isn't the time to be thinking about that."

Ok, Mr. Grumpy. Have it your way then.

The Fed’s Cracked Crystal Ball

New forecasts from the Fed suggest they see headline unemployment rising from 3.7% to 4.6% by the end of next year – equating to U-6 at around 8.3%.

The 4.6% is based on inflation falling to 3.5% as measured by the core Personal Consumption Expenditures index (PCE), the Fed’s preferred inflation measure. The latest release shows core PCE at 6%.

So, using those figures as a general rule of thumb, we can roughly estimate that taking core PCE down from 6% to its 2% goal will result in headline unemployment rising to 5.14% (equivalent to U-6 unemployment of 9.3%.

That’s about 9 million more unemployed Americans than today – completely unacceptable for sure and recession material to boot. To compare, the pandemic high was 23.1 million in April 2020. 

Wharton’s Jeremy Siegel calls Powell and the Fed hypocritical when it comes to its fighting inflation, with it suggesting continued hawkishness in the months ahead.

Siegel said that when inflation was rising after the height of the pandemic because of supply issues, Powell kept insisting that inflation was temporary and put off any action for many months.

But now, he observes, the Fed’s doing the exact opposite when it comes to structural supply-side issues that are plaguing the labor market.

"Now, [Powell is] saying we have to crush rising wage growth to stop inflation. The Fed is not supposed to act on structural shifts on supply-side problems."

Siegel said he was also disappointed in Powell's hawkishness this week.  “He acknowledged that the housing data is lagged, that housing prices are actually going down, but we're not going to see it until the middle of next year. 

“So, we're going to wait until the middle of next year before we decide whether we need to pause the rate hikes, even though we know it today?" 

Pershing Square hedge fund manager Bill Ackman also doubts the Fed’s ability to succeed in its fight against inflation. 

He said, “De-globalization, the transition to alternative energy, the need to pay workers more, lower-risk, shorter supply chains are all inflationary.” 

Ackerman isn’t the only Wallstreeter who believes the Fed’s inflation expectations are unrealistic.

BlackRock CEO Larry Fink said investors will likely have to live with inflation of around 3-4% – what he referred to as an economic “malaise.” 

Gargi Chaudhuri, also of BlackRock, warned, “Price growth in services (like rent and housing) takes longer to slow because they are thought to reflect wage growth and don’t have their prices adjusted as much as goods. 

“Because of this, the move from 5% to 2% year-over-year inflation will not be as easy as the move from 9% to 5% inflation.”

Last week, Baird’s Ross Mayfield said that the cost of getting from a 4% rate of inflation to 2% “would likely come with some significant shakeout amongst businesses and the labor market.”