One way the US labor crunch could work itself out is for a decent chunk of the missing workers to come back. But Fed officials are in no mood to wait and see if that happens, with inflation running at three times their target.
The Fed’s latest forecasts point toward cooling the economy with even higher borrowing costs, which slows the pace of hiring and increases unemployment.
“Wage growth has been very high because labor demand has been really strong relative to available supply,” New York Fed President John Williams said during a Bloomberg Television interview on Friday. “As labor demand and supply get in better balance, the wage gains will be more consistent with longer trends and our 2% goal.”
‘Maybe They’re Right’
Williams said he doesn’t see evidence of “a wage-price spiral of the kind that we saw in the 70s.” A recent historical study by the International Monetary Fund suggests that such episodes are rare.
Still, US central bankers are determined to preclude even the possibility – and judging by their own forecasts, it will be touch-and-go as to whether they can rebalance the labor market like they want to without triggering a recession.
Fed officials expect growth to slow to a crawl of 0.5% next year, while unemployment rises almost a percentage point to 4.6% — which likely means more than 1 million Americans would lose their jobs. Even with this pain, inflation proves surprisingly sticky, only gradually slowing back to 2% by 2025.
That’s probably due to the lagged effect of falling housing costs on price indices, says Beth Ann Bovino, chief US economist at S&P Global Ratings.
“They are forecasting a soft landing, maybe they are right, maybe they can pull it off,” Bovino says. “The odds are against them.” She estimates that unemployment could rise to 5.6% next year.
‘It’s Just Ingrained’
As for the non-housing services that Powell has been highlighting, Omair Sharif — the founder of Inflation Insights LLC — sees plenty of evidence that wage growth hasn’t been the primary driver of inflation there.
Prices in that category were mainly driven by increases in transportation and medical care in the first half of the year, which have now reversed, he says. There were a variety of causes, from a sudden surge in the demand for travel to quirks in how health insurance costs are calculated.
Wages weren’t a big part of the story, Sharif says. “It’s just ingrained in everybody’s minds somehow that this is how things work.”
--With assistance from Steve Matthews and Matthew Boesler.
This article was provided by Bloomberg News.