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Clive Crook

The Fed Should Get Ready for Higher Unemployment

The labor market looks too tight. Less upward pressure on prices means more people out of work.

Listening for signs of a soft landing.

Listening for signs of a soft landing.

Photographer: Win McNamee/Getty Images North America

Announcing another interest-rate increase on Wednesday, Federal Reserve Chair Jerome Powell said that the path toward a soft landing — with lower inflation and no significant rise in unemployment — has narrowed. The question is whether there is any such path.

On Thursday, the first estimate of second-quarter gross domestic product showed a fall of 0.9% at an annual rate. This came after a drop of 1.6% in the first quarter. Two consecutive quarters of lower GDP are generally termed a “technical recession” — although it’s too soon to say whether this one is the real thing. The data get revised and, more important, the labor market still looks exceptionally tight. Under current circumstances, Powell would be delighted with a pause in output growth that causes no rise in unemployment yet still presses down on inflation. That would be deemed a soft landing.