The Fed has decided that the United States will need a “growth recession” to bring inflation under control. Here’s why that’s bad news for job seekers.

In an ideal world, the Federal Reserve has already beaten pandemic-era inflation while keeping unemployment at historic lows and avoiding a recession.

Hopes for such an outcome are almost entirely dashed, and the Fed has switched to plan B.

The message from the central bank at its annual conference in Jackson Hole, Wyoming, this year was simple and stark. In remarks on August 26 that lasted less than 10 minutes, Jerome Powell, the chairman of the Fed, warned that cooling inflation “bring painto Americans through layoffs, weaker wage growth and higher borrowing costs. He said while the side effects are “unfortunate,” a failure to slow price growth and normalize the economy “would mean much greater pain”.

The speech put an end to the idea that the United States can take advantage of a so-called soft landingin which the Fed can bring inflation back to its 2% target without raising unemployment. The central bank was raise interest rates at the fastest pace since the 1980s in an attempt to relieve US demand and slow inflation. Powell made it clear in his speech that additional rate hikes are on the way, further eroding optimism for a soft landing.

In its place is the likelihood of a “growth recession,” which describes a period of slow economic growth and higher unemployment. It’s not quite stagflation, because this scenario requires high inflation in addition to these two conditions. But it’s a blunt way to stamp out inflation, and Powell’s remarks indicate that’s where the Fed is turning after more than a year of faster-than-usual price growth. Americans about to return to the workforce and seek new employment are going to feel the brunt of the pain.

“Reducing inflation will likely require an extended period of below-trend growth,” the president said, adding that “there will most likely be an easing of labor market conditions.”

Jobs will suffer the most from a growth recession

The Fed has targeted the labor market as a key battleground to fight inflation, and Powell cited the massive imbalance in labor supply and demand. Government data released last week showed the United States was still boasting about two job openings for every available worker, underscoring just how tight the labor market has become.

“Softening” this pocket of the economy would mean serious discomfort for many American workers. Higher interest rates tend to slow companies’ hiring plans as they look to protecting profits and cutting costs. Lower demand for workers can lead to lower wage gains because companies don’t have to compete as aggressively to hire.

A growth slump could even cause the unemployment rate to rise sharply if enough companies lay off workers to bolster their balance sheets. The rate sits at 3.7%, just a hair above the five-decade low seen before the pandemic. A rapid easing in labor demand could put Americans out of work at a time when businesses are no longer hiring at the voracious pace they have maintained throughout the past year.

Joe Brusuelas, chief economist at consultancy RSM US, said shortly after Powell’s speech that it would be difficult to bring inflation down without “triggering a recession” and losing 5-6 million jobs. “That’s about as close as you can get to what you can charitably call a soft landing,” Brusuelas said.

The economies of the mid-1980s and mid-1990s offer some clues as to what growth recessions look like. The first followed a period of historic inflation that forced the Fed then chaired by Paul Volcker to raise interest rates to record highs. Whereas contributed to slowing the growth of prices, the economy grew below trend. The unemployment rate did not increase, but it remained at high levels for several years before resuming its downward trend.

The economic expansion of the mid-1990s was similar, characterized by falling inflation, below-average growth, and stubbornly high unemployment. The economic expansions that followed the two growth slumps were healthy, but still bore the scars of the previous few years.

The latest growth slump is already emerging

Jobs data released on Friday offered the first sign that the economy is settling into its phase of slow growth and rising unemployment. economy added 315,000 jobs in AugustBarely exceeding the median forecast but slowing considerably from the 526,000 nonfarm payrolls increase in July.

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The June and July gains were collectively revised down by 107,000 jobs. Although job creation remains extraordinarily strong, August data suggests that the months of above-trend growth are coming to an end.

Admittedly, the rise in the unemployment rate stems from an encouraging trend. Labor force participation, which tracks the share of Americans working or actively seeking work, rose slightly last month, to 62.4% from 62.1% in July, signaling that more workers have pulled out of the labor market. work. Since the overall unemployment rate only counts participating Americans who are not working, the gain in participation has pushed the measure up.

Still, the jobs report fits perfectly with the kind of economy the Fed aims to usher in. Higher interest rates would further curb job creation, especially as rates reach levels considered restrictive for the overall economy. Easing demand for workers would also slow the rate at which newly participating Americans can find jobs.

The “slowdown” that Powell spoke of a few weeks ago is on the horizon, and with it will likely come higher unemployment, lower inflation and a period of below-potential growth.

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