As the U.S. Federal Reserve continues its attempt to fix the worst inflation seen in nearly half a century, officials have acknowledged that part of the cost of their efforts will be lost jobs, potentially several million of them. The final number depends strongly on an unlikely combination of how closely the economy follows historical trends, whether global supply chains can recover quickly enough, and how aggressively the Fed pursues its 2% inflation goal.
While the Fed has taken an optimistic tone on inflation since the beginning, when Fed Chair Jerome Powell notoriously described it as “transitory,” other economists are more skeptical of the central bank’s ability to guide the national economy to a soft landing. Jose Brusuelas, Chief Economist at RSM, a U.S.-based consulting firm, is currently estimating that lowering inflation to 2% will result in up to 5.3 million lost jobs and an unemployment rate of 6.7%, almost double the historically low unemployment rates seen lately.
The Fed has benefited from recently-released August jobs data, showing firms adding 315,000 jobs in the month, a slowdown from the more than 500,000 jobs added in July and a sign that the post-pandemic business boom may be gently slowing down without coming to a hard stop. Additionally, the number of people in the labor force increased by 800,000 to a new record high, something the Fed hopes will ease wage pressures over the long run as new entrants become more willing to take jobs if offered. However, hourly earnings have continued to increase at a 5.2% year-over-year pace, on track with previous months.
Some at the Fed are suggesting that past jobs market performance will not indicate future behavior, as well as the possibility that job openings could fall sharply without much of a rise in unemployment due to the unprecedented nature of the post-pandemic labor market. Other narratives centered around an economic soft-landing also rely on job markets acting differently than they have in the past.
Ultimately, the best outcome for the Fed relies on healed supply chains, a greater return to the workforce, and more price sensitivity on the part of consumers—basically a normalization of the economy. Should labor market pain increase, the Fed could respond by raising the inflation target rate to 3%, reducing job loss and only impacting the unemployment rate by one percentage point. At least for now, however, the Fed is committed to a 2% inflation target.