Debate is flourishing on Wall Street and at Main Street kitchen tables over the Federal Reserve's fight to lower inflation and how high unemployment will jump as a result.
On the one hand, Fed policymakers believe its rate hikes will eventually drive down strong demand in the economy without causing too much pain in the job market – in other words, a soft landing.
On the other hand, influential economists like Larry Summers say the Fed's ideal outcome hasn't materialized before, and there's no reason to think it will now.
The fight is being debated in various academic papers, but the real stakes for workers and their families are high.
Courtenay Brown and Neil Irwin write today that the issue “is not whether unemployment rises, but by how much as the Fed tightens.”
They believe the crux of the debate is the inverse relationship between unfilled job openings and the unemployment rate.
Other things being equal, as job vacancies rise, unemployment falls and vice versa.
As of May, job openings trended lower but remained near their highest levels ever at 11.3 million.
Plus, the headline unemployment rate is holding near a half-century low (remember, the headline rate is significantly underreported).
The result is an unprecedented 1.9 job openings for each unemployed worker.
By Dave Allen for Discount Gold & Silver
Debate is flourishing on Wall Street and at Main Street kitchen tables over the Federal Reserve's fight to lower inflation and how high unemployment will jump as a result.
On the one hand, Fed policymakers believe its rate hikes will eventually drive down strong demand in the economy without causing too much pain in the job market – in other words, a soft landing.
On the other hand, influential economists like Larry Summers say the Fed's ideal outcome hasn't materialized before, and there's no reason to think it will now.
The fight is being debated in various academic papers, but the real stakes for workers and their families are high.
Courtenay Brown and Neil Irwin write today that the issue “is not whether unemployment rises, but by how much as the Fed tightens.”
They believe the crux of the debate is the inverse relationship between unfilled job openings and the unemployment rate.
Other things being equal, as job vacancies rise, unemployment falls and vice versa.
As of May, job openings trended lower but remained near their highest levels ever at 11.3 million.
Plus, the headline unemployment rate is holding near a half-century low (remember, the headline rate is significantly underreported).
The result is an unprecedented 1.9 job openings for each unemployed worker.
Lower Inflation Means Unemployment Must Increase
"Fighting inflation will require a decrease in vacancies and an increase in unemployment. There is no magic tool."
So say economists Olivier Blanchard, Alex Domash and Larry Summers.
"In all episodes,” they add, “when the vacancy rate came down in a meaningful way, the unemployment rate increased substantially. There was no free lunch, and there is no reason to expect one today.”
But Fed governor Christopher Waller (a voting member of the Federal Open Market Committee) and economist Andrew Figura are saying wait just a minute in a paper published last Friday.
They argue that because the job market is so tight, each open vacancy has a lower probability in actually resulting in a hire.
So, if vacancies fall, there will be a smaller impact on hiring and in turn, a smaller rise in the unemployment rate than in a more typical labor market.
"We recognize,” they write, “that it would be unprecedented for vacancies to decline by a large amount without the economy falling into recession.
"As a result, we are, in effect, saying that something unprecedented can occur because the labor market is in an unprecedented situation."
Waller and Figura estimate that a decline in job vacancies, to 4.6% from 7%, would push up unemployment by 1 just percentage point. (The authors acknowledge that any jump in joblessness is harmful to households.)
That would still leave the jobless rate below 5%, a historically low level that Irwin and Brown say is consistent with a soft landing.
It’s also the level considered by many economists as representing maximum, or full, employment.
But Waller and Figura admit there are at least two big risks: One is that supply shocks continue for longer than expected and inflation expectations creep higher.
That will make it "extremely challenging" for the Fed to bring down inflation, and still have a soft landing.
The other is that households and companies pull back on spending as the economy slows and begin to lay off workers.
That’s already happening, though so far, it's been concentrated in limited industries like tech. Still, overall, the economy has shrunk by a cumulative 2.5% in the first half of 2022.
Waller and Figura conclude, “We recognize that it would be unprecedented for vacancies to decline by a large amount without the economy falling into recession.”
All eyes will be on this Friday’s government jobs report for any more signs of how the Fed’s four rate hikes thus far are affecting an otherwise resilient but sensitive labor market and the economy as a whole.
Friday’s article will translate the numbers and let you know where things stand.