Federal Reserve Chair Jerome Powell said pain would be necessary to quell inflation. It’s looking increasingly likely that won’t be the case.
At 3.7%, the unemployment rate is right about where it was when the Fed began raising interest rates in March 2022. Meanwhile, the pace of inflation’s descent — which has left it now only a percentage point above the central bank’s 2% target — has also surprised policymakers, just as it did on the way up.
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That combination of trends, provided it persists, is sure to fuel debate among central bankers over key takeaways from the pandemic experience.
“It’s really important to broaden the framework out, so that you’re not just relying on these ridiculously simplistic macro models that lead central bankers to conclude their trade-offs are pain or more pain,” said Julia Coronado, president of MacroPolicy Perspectives.
Each quarter, Fed officials release projections about the path for unemployment, inflation and interest rates in the years ahead. In September, they reduced their projection for where the unemployment rate was likely to stand at the end of 2024 to 4.1% from 4.5%, according to the median estimate.
A similar unemployment figure in the latest set of projections to be released Wednesday, or a downgrade to their projection for inflation next year, would indicate a solidifying expectation among policymakers that the pain they had previously warned of will largely be avoided.
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Changing Tune
Such a move would follow a similar evolution among the Fed’s staff economists, who went from predicting a recession in March to abandoning that call in July. By September, the staff had decided that the unemployment rate would “remain roughly flat” over the next few years, according to minutes of that month’s policy meeting.
The change of tune comes amid a swift moderation of inflation this year that economists inside and outside the Fed have widely attributed to improvements on the “supply side” of the economy, as businesses have adapted to supply-chain bottlenecks in product markets created first by the pandemic and then the Russia-Ukraine war.
Meanwhile in the labor market, many have cited a resumption of immigration to the US that has made it easier for businesses to hire. Other pandemic-related labor-market disruptions have receded further into the rearview mirror as well, supporting workforce participation and helping to curb upward pressure on wages.
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“In the midst of what was a high-churn, high-turnover, hot-hiring economy, there probably were some one-time strains on search costs, and that probably did push up wages on a one-time basis,” said Skanda Amarnath, executive director of Employ America, a think-tank that supports pro-labor policies. “So wage growth went up and wage growth went down, even though unemployment largely stayed in the same spot.”
Powell, for his part, has continued to indicate that further improvements to inflation may require the Fed to apply more downward pressure to the “demand side” of the economy, which could result in more job losses than currently expected.
