Earlier this week, Senator Elizabeth Warren pushed Fed Chair Jay Powell on what he would say to the two million workers the Fed expects will lose their jobs to get inflation down. It was a testy exchange. Powell’s frustration was fair, as was Warren’s.
Here’s what Chair Powell said he would tell them:
Inflation is extremely high, and it’s hurting the working people of this country badly—all of them, not just two million of them. And we are taking the only measures we have to bring inflation down.
That’s true. And surely there’s more to say to the two million. Here’s my attempt at more of that conversation. The Fed does not have many good options. It should be straight up with people hurt most. That will help them plan and help them understand.
Why do we have to lose our jobs?
You don’t have to, but you likely will.
Inflation is high, and bringing it down will require some pain, including your pain. When the Fed raises interest rates, especially as fast and as much as we have, people tend to lose their jobs, but inflation comes down.
How does it work? Here’s the basic story that we tell ourselves at the Fed:
The Fed raises interest rates, making borrowing costlier and saving a better payoff. For example, we raise our federal funds rate, and then banks raise mortgage rates. As a result, many families can no longer afford to buy a house, so the realtors don’t make money. The realtors stop going out to eat, and some restaurant servers lose their jobs. The restaurant owner, to keep other customers, won’t raise prices so much. The realtors and servers lost their jobs, the families couldn’t buy a house, and the restaurant owner lost business, but inflation is lower, at least it should be. We keep raising interest rates, and people keep losing their jobs or getting smaller raises until inflation is down. On and on. It adds up, though it’s more complicated in reality.
How sure are you?
Not very. The pandemic and war in Ukraine are unlike anything in living memory. Plus, even in more normal times, we don’t control how much is produced, how much people buy, and how much businesses raise their prices.
But two million fewer jobs are likely. It might be less to get inflation down. Or it might be more. We will stop as soon as inflation is under control. And not before.
Some of the inflation today is due to all the problems the pandemic and war in Ukraine caused in the economy. We still don’t have enough new cars to make up for the backlog when production shut down. That has puincreasedhe cost of new cars, used cars, car insurance, car maintenance, car rentals, etc. And people are still making up for the in-person spending that was unsafe during the pandemic, like going out to eat or on vacation. And a lot more was disrupted. If we ‘get back to normal,’ then inflation could come down some from that. But it’s taken a very long time to make progress, and we aren’t willing to wait anymore.
It might also be worse. When unemployment starts rising, even a small amount, it usually keeps going higher. So instead of two million of you, it could be more. Even a ‘mild’ recession like 2001 would double the number to 4 million. In a typical recession, it would be far more. Two million is optimistic. And frankly, we are getting less confident about it too. But the past three years have been like no other, so we should not lean too heavily on history as a guide. There’s a lot of uncertainty.
When will the jobs come back?
We expect at least three years of two million more unemployed.
We know that’s a long time. And for those out of work for more than a year, that will likely reduce your income for years, even after you find a job. That’s what happened after the Great Recession and other recessions. It’s especially hard on young adults.
And unlike the last few recessions, you probably won’t get extra jobless benefits or extra weeks of benefits. Because some will worry it causes inflation. We can’t do anything about that but acknowledge it will be an additional hardship.
But as we often say:
Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy. Without price stability, the economy doesn’t work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all.
It might seem strange that being unemployed for three years and earning less for a decade benefits you, but we think it does. If we don't act now and inflation stays high, it will take even higher interest rates and risks a severe recession. Millions more would be unemployed, and the job prospects for you and others would be worse. What’s happening right now is not sustainable. We can get to a place that is. Hundreds of millions are hurt by high inflation, including you. That’s unacceptable.
So will I at least pay less at the grocery store?
Prices of necessities like groceries are up a lot, and that’s a problem, as we often say:
My colleagues and I are acutely aware that high inflation imposes significant hardship, eroding purchasing power, especially for those least able to meet the higher costs of essentials like food, housing, and transportation.
But we can’t do much about food prices.
People need food, so groceries are something that most people cut back on least, which makes food spending hard for us to affect with higher interest rates. So food manufacturers and groceries can often pass along input costs, including supply disruptions like droughts, Avian flu, transportation costs, and workers’ wages.
And more generally, prices don’t fall. Businesses are wary of cutting their prices. Our goal is to slow the price increases (inflation), not the price level. In a recession, especially a severe one, overall prices might decline. But even then, it’s rare.
Why is 2% inflation worth 2 million jobs?
There’s nothing special about 2% except that’s the Fed’s goal. Central banks worldwide, starting with New Zealand, chose it too. Since the 1990s and up until the pandemic, that’s basically what inflation was in the United States.
The problem with raising the inflation goal now, such as 4%, is people might decide that the Fed isn’t serious about fighting inflation. If we raise it once, people might think we will raise it again. People and businesses will change their behavior by demanding higher raises and raising prices to avoid high inflation. And inflation will go even higher. So, the Fed would make the inflation problem worse and end up causing more unemployment to fix it.
There is no good answer to that question.
So, that’s my stab at a conversation with the two million likely to be unemployed. I tried to keep it close to what I could see the Fed possibly saying.
Some parts of the conversation are hard for me to stomach, like skirting over the topic of record profits or arguing that it’s for the unemployed’s benefit to be unemployed this year. The rest of us will benefit, but it’s a tough sell to make to them. The Fed is limited in its tools and is aware that the pain is not borne evenly or equitably. Congress has more tools and could do more to spread the pain. It’s not going to, and I suspect the two million would understand that all too well.
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"Congress has more tools and could do more to spread the pain."
I hope that in upcoming posts you discuss those tools and whether they are capable of doing more than just spreading pain around more evenly.
How about some fiscal policy and structural policy responses to excess demand and insufficient supply.