There’s a ‘very high likelihood’ of a growth recession as the Fed’s inflation fight ramps up, Powell says. It means the end of the Great Resignation and fewer raises at work.
- The Fed is poised to keep raising interest rates into 2023, putting more pressure on the already slowing economy.
- There's a 'very high likelihood' the US faces a period of below-trend growth, Fed Chair Jerome Powell said.
The US economy can still win the fight against inflation, but workers will probably take some hefty blows along the way.
The Federal Reserve raised interest rates again on Wednesday, hiking its benchmark rate by three-quarters of a percentage point for the third time since June. The increase extends the Fed's aggressive efforts to cool demand and drag inflation lower, and policymakers' latest economic projections signal the larger-than-usual rate hikes will continue into 2023 and beyond.
Yet those very same projections paint a bleak picture for the future of the US economy that could mean a "growth recession" is coming in the next year. Federal Open Market Committee officials see the economy growing just 0.2% through 2022, down from the June projection of a 1.7% gain. Growth in 2023 and 2024 was also revised lower.
The Fed officials' projected unemployment rate, meanwhile, was increased to 3.8% for 2022 and 4.4% for the following two years. Should the estimates prove correct, that would translate to roughly 1.3 million lost jobs over the next 15 months.
There's a "very high likelihood" that the US faces a period of below-trend economic growth, Fed Chair Jerome Powell said in a Wednesday press conference. The chair later added that "higher interest rates, slower growth, and a softening labor market" are all part of the economic pain Americans are likely to feel as the Fed moves to slow inflation.
Powell's words "should be translated as central bank speak for 'recession,'" Seema Shah, chief global strategist at Principal Global Investors, said. The central bank's latest projections spell out a years-long period of economic weakness. Higher rates will rein in demand for workers, leading to widespread layoffs and smaller raises. Subpar economic growth will bite into companies' growth forecasts and stock prices. And as rates climb to the highest levels since 2007, prices for mortgages, car loans, and credit card debt will soar.
"With the new rate projections, the Fed is engineering a hard landing – a soft landing is almost out of the question," Shah said. "Times are going to get tougher from here."
A so-called soft landing is the ideal ending for an inflationary spell. Price growth would cool down without a rise in unemployment or a significant slowdown in overall growth. That ship has sailed, and with inflation proving harder to cool than expected, a hard landing is now the most likely scenario.
Weakening the labor market is one of the aims of the Fed's tightening in the first place. The workforce remains extremely imbalanced, with job openings currently doubling the number of available workers. The gap opened the door for Americans to quit at record rates through 2022, a trend which has since been deemed the Great Resignation. Higher rates stand to curb labor demand, and as job openings fall, workers will likely lose confidence in their ability to quit and find jobs elsewhere.
There's only been "modest evidence" that the labor market is balancing out, the chair said. Since inflation remains so high and the labor market so tight, restrictive interest rates will need to be in place "for some time," he added.
To be sure, persistently high inflation poses a large risk to the US economy. Soaring prices have already eaten away at workers' wage gains despite most experiencing historically strong pay growth this year. Letting inflation stay near four-decade highs would mean "far greater pain later on," Powell said.
Still, the prevailing message from the Fed's latest press conference was clear. Winning the war on inflation will be difficult, and the path forward will push the economy to the very brink of a self-induced recession.