Fed Needs to Forget About Inflation and Focus on Jobs
Labor market trends demand the attention of policymakers and possibly a few surgical interest-rate cuts next year.
Shifting focus.
Photographer: Andrew Caballero-Reynolds/AFP via Getty Images
The inflation scare is barely behind us, and it is already time for the Federal Reserve to focus on recession risks. The recent trajectory of job growth means policymakers can no longer rule out unemployment snowballing in 2024, which should force a shift in how they think about managing their dual mandate.
Lowering the Fed Funds rate by 50-75 basis points over the next few quarters would reduce the risk of more drastic interest rate cuts in a recession — and may even stave off recession.
Last week marked a turning point for the balance of risks to the economy — for now at least. The unemployment rate at 3.9% in October is slightly above the Fed’s end-2023 forecast of 3.8%. More significantly, it has risen 50 basis points since April, an exceptional move for a healthy economy. By this point in 2001, 2007 and 2020, the US economy was entering recession.
As much as one can make the case that everything is fine, and that the rise in unemployment is influenced by unusual factors — the way so much has been in recent years — policymakers can’t shrug off a trend like this, and I suspect they won’t.