Armstrong Economics Blog/Economics Re-Posted Jun 23, 2022 by Martin Armstrong
Jerome Powell recently admitted that combating inflation will lead to rising unemployment. Powell admitted that to establish price stability, the labor market will need to take a hit. “I would characterize that, if you were to get inflation down to, YOU KNOW, on its way down to 2 percent and the unemployment rate went up to 4.1 percent, that’s still a historically low level. We hadn’t seen-we hadn’t seen rates, unemployment rates below 4 percent until a couple years ago for, we’d seen it for like one year in the last 50. So, the idea that 3.6 percent is historically low in the last century. So, a 4.1 percent unemployment rate with inflation well on its way to 2 percent, I think that would be, I think that would be a successful outcome. So, we’re not looking to have a higher unemployment rate, but I would say that I would certainly look at that as a successful outcome,” Powell admitted.
The Fed Chairman said that they would “love” to return to the labor market that we experienced pre-pandemic when unemployment was at a historic low of 3.5%, and wage growth surpassed inflation. That is but a dream. “We’re not, again, we’re not, 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 admitted. The pandemic and COVID restrictions has ruined the US job market for many years to come.
Former Treasury Secretary Larry Summers weighed in on the topic recently but was blunter with his message. “We need five years of unemployment above 5% to contain inflation – in other words, we need two years of 7.5% unemployment or five years of 6% unemployment or one year of 10% unemployment,” Summers said while speaking in London.
That would indicate an immediate 1.4% decline in employment within the next few months on the low end of his estimate. Another 75 basis point rate hike is not off the table for July as the Fed has become hawkish in reversing its failed policies. Regardless, the US workforce is expected to take a big hit in the near future due to fiscal and policy mismanagement. The cost of basic necessities is rising, housing is unaffordable, and countless people will lose their jobs. The worst is yet to come.