We are approaching the limits of Monetary Policy…

Milton Friedman’s theories gave him the Nobel Prize; Chile was given to General Pinochet”

Eduardo Galeano

It appears that members of the Fed’s Open Market Committee are in favor of slowing down interest rates, which have risen 75 basis points at each of the last four meetings. The costs in some sectors of the productive economy have been high, undermining their productivity and competitiveness.

Federal funds rate futures suggest a slight drop in expectations for the final federal funds rate for this cycle, placing it at levels close to 5 percent.

The Fed minutes suggest that the confidence of the central bank to engineer a soft landing has diminished, the expected increase in unemployment over the next year will not occur without the economy not going into recession and affecting only the hand-intensive sectors work, without reactions from the market or companies.

Although the pace of rate hikes is expected to slow, rates are expected to peak at levels higher than what the Fed forecast, which will increase recessionary risks as monetary policy lags the economy and differentiated across sectors.

To engineer a soft landing, the Fed will need to tighten its monetary policy sufficiently to slow GDP growth below its potential, thereby reducing labor demand, hitting labor-intensive sectors to a greater extent. work and reduce the growth of nominal wages, in order to exert downward pressure on inflation.

Real GDP growth is helping to rebalance supply and demand in the labor market, taking into account the characteristics of each sector.

The Fed minutes show that “many” participants believe that the tightening of financial market conditions had notable effects on “some” interest rate-sensitive sectors, although its impact on the broader economy, including the market labor and inflation, it has not been clear. It’s not what the Fed is looking for, and it’s one of the reasons why an additional 25 basis point rate hike will have to be added.

Many participants acknowledged that there are signs that the imbalance between labor supply and demand is beginning to be resolved, although not immediately.

The Fed seeks to reduce labor demand without affecting economic growth or increasing the unemployment rate, so the sectors most sensitive to the effects of rates must be closely monitored and their impact on the labor market quantified.

The path desired by the Federal Reserve is for job offers to decrease without translating into increases in unemployment, which requires that labor demand must weaken further, which will coincide with the increase in the number of unemployed people.

The path to a soft landing would be achieved through reduced job offers, with minimal increases in the unemployment rate; In other words, those people who are laid off must quickly find a new job, adapting to the requirements of the labor market, and companies will seek to maintain the productivity of their workforce.