The Federal Reserve is on a mission to combat inflation by any means necessary, even if widespread job losses is the result of its crusade. Minutes from the September Federal Open Market Committee (FOMC) confirmed this, reiterating what officials have been saying for weeks: The central bank will adopt a restrictive policy of raising interest rates and leaving them higher for longer. But while this might achieve the broader objective of bringing price inflation back down to the artificial 2% target rate, it could lead to higher unemployment and a lower gross domestic product, according to the Bank of America.
Job Losses on the Way?
Should the American people brace for a hard crash instead of a soft landing? If the Bank of America’s estimates are accurate, it might be appropriate to prepare for impact, particularly in the labor market. After the US finally returned all the jobs that were lost during the coronavirus pandemic, the good times could be reaching their conclusion.
Speaking in a recent interview with CNN, Michael Gapen, the head of US Economics at the Bank of America, projected that the United States would lose about 175,000 jobs in the first quarter of 2023. He added that the unemployment rate would peak at around 5.5% sometime next year. A recession, according to the financial institution, would occur in the first half of next year.
“The premise is a harder landing rather than a softer one,” he told the network. “We could see six months of weakness in the labor market. Although nobody wants to be callous about someone losing their job, this could be classified as a mild recession.”
The US economy met the technical definition of a recession in the first half of 2022 after back-to-back quarterly negative GDP readings. But the myriad of data points suggests that the country could be slipping into a much worse downturn than what occurred in the first and second quarters. Durable goods orders declined, factory activity flatlined, and the manufacturing purchasing managers’ index (PMI) prints have been abysmal. The US housing market fell into a recession, the stock market is still deep in the red, and inflation remains highly elevated.
Still, the Bank of America’s projected size of employment losses could be the most surprising forecast of them all, as not even the Fed anticipates winter coming for the jobs arena heading into the new year.
The Problems of Intervention
Liberty Nation has discussed the issues with utilizing the Phillips Curve to somehow reinstitute price stability in the marketplace. But the other concern is that the central bank’s quest to extinguish red-hot inflation is a failure of interventionist economics. Remember, the Bizarro Economy was started because of the Federal Reserve’s extraordinary efforts of unlimited quantitative easing and artificially lower interest rates. Now the Fed needs to intervene to resolve the consequences emanating from the immense money expansion. Should job losses become prevalent nationwide, the Fed will need to get involved once again to stimulate growth by either cutting interest rates or monetizing the debt that Washington will incur to prevent an economic downturn. It is a never-ending vicious cycle.
Are Cracks Forming Already?
If the Bank of America is correct about next year, then the US labor arena could already be seeing cracks forming across the country. In September, US-based firms announced plans to slash nearly 30,000 jobs from their payrolls, the highest level in three months. Employment subindexes have weakened throughout multiple purchasing managers’ index (PMI) readings. Initial jobless claims have edged higher again. Job openings cratered in August, falling to just above ten million. In economics, it is typically stated that it is best to wait around six months for a public policy pursuit to seep into the system. Since the Fed pulled off its first rate hike in March, the nation is due for the pain that Chair Jerome Powell has promised. Tick tock.