Fed's inflation fight spells pain ahead for 'tight' labour market

THE Federal Reserve projected its aggressive plan to fight inflation will drive up the ultralow unemployment rate - an outcome Chair Jerome Powell says is needed in an overheated labour market full of imbalances.

"The labour market has remained extremely tight," Powell said in the opening remarks of his Wednesday press conference following a meeting at which policymakers raised interest rates by 75 basis points and signalled more increases to come.

Unemployment was 3.6 per cent in May, or just slightly above the pre-pandemic level, which was the lowest in 50 years. At the same time, inflation last month reached 8.6 per cent, the highest since 1981.

The US central bank, one of the few globally to have both price stability and maximum employment as part of its legal mandate, has pivoted hard to to cool price pressures. The rate increase was the largest since 1994 and Powell said officials could do the same thing next month, or take a smaller 50 basis-point step, and want to see compelling evidence inflation is heading lower.

Forecasts released on Wednesday (Jun 15) signalled officials have pencilled in another 175 basis points of tightening this year, lifting the benchmark rate to 3.4 per cent by December. They see rates peaking at 3.8 per cent in 2023, according to their median estimate.

Those same forecasts show the jobless rate climbing to 4.1 per cent by the fourth quarter of 2024. That's what's needed to cool demand enough to bring inflation down toward the Fed's 2 per cent goal, Powell argued.

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"We don't seek to put people out of work - we never think too many people are working and fewer people need to have jobs, but we also think that you really cannot have the kind of labour market we have without price stability," Powell said.

He and his colleagues have often pointed to the labour market right before the pandemic, which saw historic gains for groups that are often marginalised, as ideal. The Black and Hispanic unemployment rates hit record lows, and women were starting to come into the labour market after years of exits following the financial crisis.

Now, more than 2 years after the start of the pandemic, US workers are again reaping the benefits of a hot labour market. The Black labour-force participation rate rose in May to 63 per cent, above the level for the overall population for the first time in 50 years. The labour force of women in their prime working years has recovered more than that of men.

But there are also signs that it's too hot - the number of job vacancies is about double that of workers looking for employment. That has in turn led to an imbalance in wage negotiations, Powell said.

Rectifying price stability "is in service, in the medium and longer-term, of the kind of labour market we want and hope to achieve", Powell said.

Some economists argue that the Fed's own forecasts - where they're able to lower inflation, keep the economy from entering a recession and limit labour-market damage - are a fairytale.

"The Fed's forecasts are still remarkably optimistic," William Dudley, former New York Fed president and an adviser to Bloomberg Economics, said in a Bloomberg Television interview. "The risk is that the Fed's going to have to cause more pain. And it would be better for the Fed to be more forthcoming about that." BLOOMBERG