Federal Reserve officials have acknowledged that the battle against inflation will be paid for with lost jobs, and the U.S. central bank will need an unlikely combination of events to keep those losses to a minimum as interest rates continue to rise.
Economists assessing the trade-off facing the Fed estimate U.S. employment could drop by anywhere from a few hundred thousand positions to as many as several million.
The final tally will depend on how closely the economy follows patterns seen in recent decades, to what extent things like improved global supply chains help lower inflation, and how strict the Fed is in enforcing its 2% inflation goal.
With the central bank's preferred inflation measure currently increasing at more than a 6% annual rate, Joe Brusuelas, chief U.S. economist at RSM, a U.S.-based consulting firm, estimates it would take 5.3 million lost jobs and an unemployment rate of 6.7%, nearly double the 3.5% in July, to lower inflation to 2%.
"Can the Fed achieve a pure soft landing? ... Probably not," Brusuelas said, referring to a scenario in which monetary tightening slows the economy, and inflation, without triggering a recession. "It is difficult to envision a benign outcome."
The release of the Labor Department's August employment report on Friday will provide the latest pulse of an economy that is continuing to confound. Economists polled by Reuters expect 300,000 jobs were added last month, as U.S. companies scramble to hire hard-to-find workers even as the economy slows and Fed rate hikes promise to slow it further.
The report will include wage growth data important to the Fed's deliberations on whether to raise interest rates by half a percentage point or three-quarters of a percentage point at the Sept. 20-21 policy meeting.
After the July gain of more than half a million jobs blew away expectations, another strong job growth reading could push policymakers toward a larger rate hike, as would continued strong wage gains. A dip towards the monthly average gain of 183,000 jobsseen in the decade before the coronavirus pandemic could pull in the other direction.
Fed officials hope the burden of fighting inflation falls less on employment than other parts of the economy, even as for months they've bemoaned the labor market's current state as unsustainable.
Cleveland Fed President Loretta Mester this week said recent wage increases were "not consistent with inflation returning to our 2% goal." An Atlanta Fed wage tracker shows worker pay on average was rising at annual rate of 6.7% as of July, and Mester said that would "need to moderate to around 3.25% to 3.5% to be consistent with price stability."
Fed officials have been less specific about what will bring things into balance, with some of the working ideas requiring U.S. job markets to act differently than they have in the past.
Fed Governor Christopher Waller has pointed to the Beveridge Curve, which plots the relationship between job openings and the unemployment rate, to argue that the labor market could behave differently this time.
The current ratio of two job openings for each unemployed person is a record high. Typically when the job vacancy rate falls, the unemployment rate rises as it becomes harder for job seekers to find a match.
But Waller argues the Beveridge Curve changed during the pandemic, and is in a place now that would allow job openings to fall sharply as the economy slows, relieving pressure on wages and prices, without much of a rise in unemployment.
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"We recognize that it would be unprecedented for vacancies to decline by a large amount without the economy falling into recession...We are, in effect, saying that something unprecedented can occur because the labor market is in an unprecedented situation," Waller wrote in a research note published by the Fed in late July.
