Why unemployment will likely rise whether or not there’s a recession

Unemployment application (Photo: MGN Online)

(CBS) — Signs are mounting that the hottest job market in a generation is starting to cool off. With the crypto bubble popping, technology companies pulling back on hiring and consumers increasingly skittish about spending, economists believe that the historically low unemployment rate is likely to go up — recession or no recession.

The Federal Reserve made that much clear last week when it hiked interest rates by 0.75% — a move designed to tame inflation as well as loosen the job market, which the Fed sees as tilted to an unhealthy degree in favor of workers.

While a rise in unemployment doesn’t necessarily mean a recession, it does signal that the job market is shifting. Here are the biggest indicators that change is on the way.

Federal Reserve Chairman Jerome Powell has cautioned that a sharp rise in unemployment may be coming as the Fed hikes its interest rates at the fastest pace in 25 years. Speaking at a central bankers’ forum in Sintra, Portugal, on Tuesday, Powell said there was “no guarantee” the Fed could raise rates just enough to slow inflation without causing a recession.

“We believe we can do that. That is our aim,” he said, but added, “It’s gotten harder. The pathways have gotten narrower.”

Last week, the Fed revealed that its renewed focus on taming inflation at all costs would likely push up unemployment. After previously predicting that unemployment would fall to 3.5% this year and next, the Fed now expects the rate to rise to 3.9% next year, and to 4.1% the year after that. The Fed also updated its policy statement to remove a previous prediction that the labor market would “remain strong.”

“It is notable that they are now forecasting a significant rise in unemployment by 2024 and that they dropped the reference to expecting the ‘labor market to remain strong’ in the statement,” Brian Coulton, chief economist at the Fitch Group, noted at the time.

In the Fed’s view, a 4.1% unemployment rate would still be low by historical standards, Powell emphasized at a press conference after the hike.

“We don’t seek to put people out of work, of course, 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 labor market we want without price stability,” he told reporters.

“We hadn’t seen unemployment rates below 4% until a couple years ago; we’d seen it for like one year in the last 50,” Powell said. “A 4.1% unemployment rate with inflation well on its way to 2% — I think that would be a successful outcome.”

 

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