How many jobs must be cut before the Fed stops raising rates?

Powell said he now sees the unemployment rate rising to 4.4 percent next year, the equivalent of losing about 1.3 million jobs.

“I wish there was a painless way to do this, but there isn’t one. We certainly haven’t given up the idea that we have a modest rise in unemployment,” he said.

Some other members of the powerful Fed board recorded expectations of a higher unemployment rate of 5 percent by the end of next year – more than 1.5 million jobs were lost.

This peak in unemployment is commonly referred to as the non-accelerating unemployment rate (NAIRU) – the unemployment rate at which wage growth begins to slow.

Powell hopes the unemployment rate doesn’t have to climb higher than 4.4 percent to tame inflation because there are too many vacancies in the market. In other words, instead of losing jobs, there may be many vacancies that employers are no longer offering.

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However, other experts are more pessimistic, with Matthew Luzzetti, chief economist at Deutsche Bank in the US, forecasting an even higher NAIRU.

“Our current estimates for NAIRU are in the range of 5 percent to 5.5 percent, and our final rate of 5 percent expects us to stay close to that level through early 2023.”

That’s the equivalent of nearly 2 million job losses.

PIMCO’s US chief economist Tiffany Wilding also expects a higher NAIRU. “I wouldn’t be surprised if we see 5 percent more in line with the underlying neutral level of unemployment,” Ms Wilding said.

The Federal Reserve Bank of San Francisco projects the non-inflation rate to be even higher at 6 percent.

Following Wednesday’s rate hike, the Fed released weaker economic forecasts that showed higher unemployment and slower growth. The unemployment rate is expected to rise to 3.8 percent from the current 3.7 percent by the end of this year and rise to 4.4 percent next year, where it is expected to remain until the end of 2024, before falling back to 4.3 percent in 2025 .

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These forecasts are well above the June forecasts, which had an unemployment rate of 3.7 percent this year, 3.9 percent next year and 4.1 percent in 2024.

Former Fed Vice Chairman Richard Clarida said he expected the Fed’s forecasts could be a little conservative and that the further the forecasts went, the less reliable they would be.

“A 1.5 percent increase in the unemployment rate is more realistic,” Clarida said, which would indicate an unemployment rate of 5.2 percent.

The strength of wage growth will be the key indicator of how far the Fed will hike rates.

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In the past 12 months, average hourly earnings in the US have increased by 5.2 percent. Even on a monthly basis, wages are still rising, up 0.4 percent in August.

The Atlanta Fed’s official wage tracker hit 6.7 percent — the highest since the index began in 1983.

As US President Joe Biden continues to support union efforts for higher wages, estimates of the neutral unemployment rate are likely to keep changing. Mr Biden played a key role in the recent row between rail unions and rail haulage companies over a bigger pay rise, which averted a threatened last-hour strike.

Reports of the dead link between the unemployment rate, wage growth and inflation – also known as the Phillips curve – are grossly exaggerated.

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