One of the biggest unknowns since the Federal Reserve started its historic rate-hiking campaign has been how many jobs could be lost from the central bank’s deliberate effort to slow down the US economy.
So far, the labor market has stayed white hot, with unemployment hovering at a half-century low. But Fed Chair Jerome Powell’s acknowledgment on Wednesday that the banking sector meltdown could lead to “tighter credit conditions for households and businesses, which would in turn affect economic outcomes” has critics reminding him of the human impact of that “Fedspeak:” Millions of people out of work.
The Fed’s latest economic projections, released on Wednesday, were largely in line with those from its last forecast, in December. In fact, the unemployment picture even grew a tinge less gloomy, with an estimated 2023 jobless rate of 4.5% instead of 4.6%.
Assuming no change in the labor force, going from the current unemployment rate of 3.6% to 4.5% would mean 1.5 million more people would be unemployed by the end of the year, according to the Fed’s projections.
While the Fed’s own estimates hint at some sort of stability, even the head of the central bank is quick to note that’s far from the case.
“It’s a highly uncertain estimate,” Fed Chair Jerome Powell said Wednesday.
And, economists say, that uncertainty is heightened, given the banking turmoil of the past two weeks.
A ‘trilemma’ with a delicate balance to strike
The Fed now is facing a “trilemma” of re-establishing price stability, minimizing unemployment and restoring financial stability, said Joe Brusuelas, RSM US chief economist. And the probability is low that the Fed will be able to bring down inflation without causing a recession, preventing further consolidation in the banking sector or increasing unemployment, he said.
“We are in a situation with inflation elevated and now a banking crisis on top of that,” Brusuelas told CNN. “The Fed’s attempt to strike a delicate balance between price stability, employment and financial stability will require something to give. And that something is going to be right around 1.5 million jobs, if the Fed’s forecast is prescient for the [4.5%] unemployment rate.”
Brusuelas currently projects a 5.1% unemployment rate, which would be consistent with 2.5 million jobs lost, 3% inflation and a potential recession.
“I think that the Fed’s going to move toward an above 5% unemployment rate forecast, either in June or by September,” he said. “We were 3.4% two months ago. That’s non-trivial.”
The quick escalation of a jobless rate to that level or even the Fed’s 4.5% has sparked concern and criticism, most notably from Senator Elizabeth Warren. Earlier this month, the Democratic congresswoman from Massachusetts (and frequent Powell critic) pressed Powell about American jobs sacrificed for the Fed’s goals.
On Wednesday, Warren reiterated some of her concerns, saying Powell’s actions present a “danger” to the economy.
Powell has frequently countered that persistently high inflation remains a far more dangerous prospect.
“The costs of bringing it down, there are real costs to bring it down to 2%,” he said Wednesday. “But the costs of failing are much higher.”
A new wild card
Then there’s also the scenario that the Fed could get an assist from an unlikely bedfellow — the banking crisis.
“The tightening of lending standards and actual lending that’s going to ensue on the backside of this will cool the economy in a significant way, and that might,” Brusuelas said, emphasizing the importance of the word ‘might,’ “avoid larger job losses than what our research indicated prior to the onset of the banking crisis. But we’ll have to see. Banking crises are profoundly non-linear events, and they’re going to impact the different industrial systems in uniquely different ways.”
The actions taken by the Fed, the Federal Deposit Insurance Corporation and Treasury appear to have contained the crisis, said Eugenio Alemán, chief economist with Raymond James.
“I think that the worst is over; the Federal Reserve has been very, very tough and very, very clear that they will backstop any further run against the banking system or banking institutions,” he said. “So I think that is on the mend.”
Now, the question is how bad was this for expectations, or how consumers and businesses feel about the economy, he said.
Business cycles, too, can evolve in non-linear fashion, said Gregory Daco, chief economist at EY-Parthenon.
“Many of the commentators are right in assessing that the possibility of just a mild slowdown is perhaps overestimated, is perhaps seen as too likely,” he said. “And once we start to see sentiment shift, either in the business sector or in the consumer sector, that can feed off of itself — that can lead to further weakness, which could lead to a stronger rise in the unemployment rate and weaker economic conditions.”
However, he added, there are still too many potential uncertain factors in the economy to really know how this might develop.
“I think we will see slower economic activity. I do think the odds of a recession have increased in the wake of this banking sector crisis,” he said. “And in particular, I think that we should be paying very close attention to credit conditions.”
Prior to this recent episode, about half of banks had already tightened credit standards for commercial and industrial loans, Daco said, adding he estimates that to grow to 75% to 80%.
“Maybe even higher,” he said.
“That is going to constrain business investment, that is going to constrain hiring, and that is going to constrain consumer spending. And so that will lead to weaker economic activity going forward.”