(Trends Wide) — One of the biggest unknowns since the Federal Reserve began its historic push to raise rates has been how many jobs might be lost as the central bank tries to slow the US economy.
So far, the job market has remained healthy, with unemployment hovering around its lowest point in half a century. But Fed Chairman Jerome Powell’s acknowledgment Wednesday that the collapse of the banking sector could lead to “tighter credit conditions for households and businesses, which in turn would affect economic outcomes,” led to critics will remind you of the human impact of your claims: millions of people out of work.
The Fed’s latest economic projections, released Wednesday, were largely in line with its previous forecast, from last December. In fact, the unemployment picture is even less bleak, with an estimated unemployment rate for 2023 of 4.5% instead of 4.6%.
Assuming no change in the labor force, going from the current unemployment rate of 3.6% to 4.5% would mean an additional 1.5 million people would be unemployed by the end of the year, according to the projections of the Fed.
While the Fed’s own estimates hint at some sort of stability, even the central bank chief is quick to point out that that is far from the case.
“It’s a very uncertain estimate,” Powell said Wednesday.
And, economists point out, that uncertainty is heightened by the banking turmoil of the past two weeks.
A ‘trilemma’ with a delicate balance to achieve
The Fed now faces a “trilemma” between restoring price stability, minimizing unemployment and restoring financial stability, said Joe Brusuelas, chief economist at RSM US. And the chances are low that the Fed can reduce inflation without causing a recession, preventing further consolidation in the banking sector or increasing unemployment, he said.
“We are in a situation with high inflation and now a banking crisis is added,” Brusuelas told Trends Wide. “The Fed’s attempt to strike a delicate balance between price stability, employment, and financial stability will require some effort. And that effort will be about 1.5 million jobs, if the Fed’s forecast on the unemployment rate is prescient. [4,5%]”.
Brussels currently projects an unemployment rate of 5.1%, which would be consistent with the loss of 2.5 million jobs, inflation of 3% and a possible recession.
“I think the Fed will move towards an unemployment rate forecast above 5%, either in June or in September,” he said. “We were 3.4% two months ago. That’s not trivial.”
The rapid escalation of the unemployment rate to that level or even to the Fed’s 4.5% has generated concern and criticism, most notably from Senator Elizabeth Warren. Earlier this month, the Massachusetts Democratic congresswoman (and frequent Powell critic) questioned Powell about American jobs being sacrificed for the Federal Reserve’s goals.
On Wednesday, Warren reiterated some of his concerns, saying Powell’s actions present a “danger” to the economy.
Powell has repeatedly countered that persistently high inflation presents a far more dangerous prospect.
“There are real costs in reducing it to 2%,” he said on Wednesday. “But the costs of failure are much higher.”
US employment
a new joker
Then there’s also the scenario in which the Fed could get help from an unlikely ally: the banking crisis.
“The tightening of credit standards and the actual borrowing that will come from this crisis will cool the economy significantly, and that could,” Brusuelas said, stressing the importance of the word ‘could’, prevent further job losses in this regard. than our research indicated before the onset of the banking crisis. But we will have to see. Banking crises are profoundly non-linear events and are going to impact different industry systems in singularly different ways.
Actions taken by the Fed, the Federal Deposit Insurance Corporation and the Treasury appear to have contained the crisis, said Eugenio Aleman, chief economist at Raymond James.
“I think the worst is over; the Federal Reserve has been very, very tough and very, very clear that they will support any new run on the banking system or banking institutions,” he said. “So I think it’s getting better.”
Now the question is how bad was that for expectations, or how consumers and businesses feel about the economy, he said.
Business cycles can also evolve in non-linear ways, said Gregory Daco, chief economist at EY-Parthenon.
“Many of the commentators are correct in assessing that the possibility of a mild slowdown is perhaps overestimated, perhaps considered too likely,” he said. “And once we start to see a change in perceptions, either in the corporate sector or in the consumer sector, that they can feed themselves, we can go to further weakness, which could in turn lead to a stronger rise in the unemployment rate and weaker economic conditions.”
However, he added, there are still too many potentially uncertain factors in the economy to really know how this could play out.
“I think we will see slower economic activity. The odds of a recession have increased in the wake of this banking sector crisis,” he said. “And in particular, I think we should pay close attention to credit conditions.”
Before this recent episode, about half of the banks had already tightened credit standards for commercial and industrial loans, Daco said, adding that he estimates it will grow 75-80%.
“Maybe even more,” he said.
“That’s going to limit business investment, hiring and consumer spending. And that will lead to weaker economic activity in the future.”
(Trends Wide) — One of the biggest unknowns since the Federal Reserve began its historic push to raise rates has been how many jobs might be lost as the central bank tries to slow the US economy.
So far, the job market has remained healthy, with unemployment hovering around its lowest point in half a century. But Fed Chairman Jerome Powell’s acknowledgment Wednesday that the collapse of the banking sector could lead to “tighter credit conditions for households and businesses, which in turn would affect economic outcomes,” led to critics will remind you of the human impact of your claims: millions of people out of work.
The Fed’s latest economic projections, released Wednesday, were largely in line with its previous forecast, from last December. In fact, the unemployment picture is even less bleak, with an estimated unemployment rate for 2023 of 4.5% instead of 4.6%.
Assuming no change in the labor force, going from the current unemployment rate of 3.6% to 4.5% would mean an additional 1.5 million people would be unemployed by the end of the year, according to the projections of the Fed.
While the Fed’s own estimates hint at some sort of stability, even the central bank chief is quick to point out that that is far from the case.
“It’s a very uncertain estimate,” Powell said Wednesday.
And, economists point out, that uncertainty is heightened by the banking turmoil of the past two weeks.
A ‘trilemma’ with a delicate balance to achieve
The Fed now faces a “trilemma” between restoring price stability, minimizing unemployment and restoring financial stability, said Joe Brusuelas, chief economist at RSM US. And the chances are low that the Fed can reduce inflation without causing a recession, preventing further consolidation in the banking sector or increasing unemployment, he said.
“We are in a situation with high inflation and now a banking crisis is added,” Brusuelas told Trends Wide. “The Fed’s attempt to strike a delicate balance between price stability, employment, and financial stability will require some effort. And that effort will be about 1.5 million jobs, if the Fed’s forecast on the unemployment rate is prescient. [4,5%]”.
Brussels currently projects an unemployment rate of 5.1%, which would be consistent with the loss of 2.5 million jobs, inflation of 3% and a possible recession.
“I think the Fed will move towards an unemployment rate forecast above 5%, either in June or in September,” he said. “We were 3.4% two months ago. That’s not trivial.”
The rapid escalation of the unemployment rate to that level or even to the Fed’s 4.5% has generated concern and criticism, most notably from Senator Elizabeth Warren. Earlier this month, the Massachusetts Democratic congresswoman (and frequent Powell critic) questioned Powell about American jobs being sacrificed for the Federal Reserve’s goals.
On Wednesday, Warren reiterated some of his concerns, saying Powell’s actions present a “danger” to the economy.
Powell has repeatedly countered that persistently high inflation presents a far more dangerous prospect.
“There are real costs in reducing it to 2%,” he said on Wednesday. “But the costs of failure are much higher.”
US employment
a new joker
Then there’s also the scenario in which the Fed could get help from an unlikely ally: the banking crisis.
“The tightening of credit standards and the actual borrowing that will come from this crisis will cool the economy significantly, and that could,” Brusuelas said, stressing the importance of the word ‘could’, prevent further job losses in this regard. than our research indicated before the onset of the banking crisis. But we will have to see. Banking crises are profoundly non-linear events and are going to impact different industry systems in singularly different ways.
Actions taken by the Fed, the Federal Deposit Insurance Corporation and the Treasury appear to have contained the crisis, said Eugenio Aleman, chief economist at Raymond James.
“I think the worst is over; the Federal Reserve has been very, very tough and very, very clear that they will support any new run on the banking system or banking institutions,” he said. “So I think it’s getting better.”
Now the question is how bad was that for expectations, or how consumers and businesses feel about the economy, he said.
Business cycles can also evolve in non-linear ways, said Gregory Daco, chief economist at EY-Parthenon.
“Many of the commentators are correct in assessing that the possibility of a mild slowdown is perhaps overestimated, perhaps considered too likely,” he said. “And once we start to see a change in perceptions, either in the corporate sector or in the consumer sector, that they can feed themselves, we can go to further weakness, which could in turn lead to a stronger rise in the unemployment rate and weaker economic conditions.”
However, he added, there are still too many potentially uncertain factors in the economy to really know how this could play out.
“I think we will see slower economic activity. The odds of a recession have increased in the wake of this banking sector crisis,” he said. “And in particular, I think we should pay close attention to credit conditions.”
Before this recent episode, about half of the banks had already tightened credit standards for commercial and industrial loans, Daco said, adding that he estimates it will grow 75-80%.
“Maybe even more,” he said.
“That’s going to limit business investment, hiring and consumer spending. And that will lead to weaker economic activity in the future.”
