As the Federal Reserve battles rising prices, its efforts will be felt not only by borrowers and bond dealers, but by pretty much everyone who works for a living.
The central bank has raised interest rates and made borrowing more expensive to slow down the entire economy so people don’t spend as much. In this way, companies will offer lower prices.
Part of the solution involves what Fed Chair Jerome Powell calls “softening of labor market conditions.” This slowdown, as envisioned by Powell and his colleagues, will lead to higher unemployment in the coming year.
But Fed officials speak in abstractions, discussing supply and demand or the importance of balancing imbalances between the two, while avoiding talking about the material implications for workers.
“The language used to talk about monetary policy is almost designed to make less clear what’s actually at stake and what the real goals are,” said JW Mason, associate professor of economics at John Jay College from the City University of New York of Criminal Justice.
Powell has acknowledged that the Fed’s anti-inflation campaign will cause some “pain,” perhaps up to and including a recession. But workers who remain employed will also feel the effects of rate hikes.
“The only way higher interest rates will lower inflation is by increasing unemployment and thereby making workers accept lower wages,” Mason said.
Wage growth accelerated this year at the fastest pace in more than two decades, but overall gains have not kept pace with rapidly rising consumer goods prices. Powell has identified stable prices as a necessary ingredient for a healthy economy.
The growth in nominal wages came amid an aggregate supply-demand mismatch that economists say is due to supply issues such as
The Fed can’t do anything about the supply problems, but Powell has said it will continue to depress demand until inflation eases. So far this year, the Fed’s historically rapid rate hikes have not been enough, as headline inflation is still soaring at 8.2% in September, while unemployment remains at a historically low 3.7%.
Fed policymakers have said they expect unemployment to rise to 4.4% next year as a result of their measures, meaning millions of additional workers could be out of work. An increase in the unemployed population would likely mean that more people would be willing to work for less pay.
Powell has hinted that workers are too strong right now, describing the current power dynamic as out of whack with what the Fed would see as a better balance between bosses and workers.
“They essentially have two open positions for every person who is actively looking for a job, and that has created a real imbalance in wage bargaining,” Powell said at a news conference in June.
With a more “normal” jobseeker-to-vacancy ratio, Powell said, “one would expect this wage pressure to come back down to a level where people are still getting healthy wage increases and real wage increases, but at a constant level with 2% inflation.” .”
“The only way higher interest rates will lower inflation is by increasing unemployment, thereby making workers accept lower wages.”
– JW Mason, associate professor of economics
Powell has outlined a “soft landing” scenario in which companies cut record job vacancies without losing too many actual jobs. So far, the strategy may be working as the number of job vacancies fell by a record 1 million in September while unemployment rose slightly. The rapid decline in openings could also be a signal that the Fed’s rate hikes are working better than expected and that it should hold off on further action.
The ultimate extent of job losses, Powell said last month, will depend in part “on how quickly wage and price inflationary pressures abate.”
Mason doubts that lower wage growth is actually necessary for lower inflation, as he doesn’t believe higher wages cause higher prices. For one, companies that pay higher wages might simply accept lower profits instead of raising prices. But the companies have pushed up prices while posting record profits.
Fed Vice Chairman Lael Brainard, one of the more dovish members of the central bank’s Board of Governors, hinted in a speech this month that companies may be reluctant to lay off workers after complaining about labor shortages over the past year. And she said companies could lower prices, noting that profit margins in some retail sectors have outpaced increases in compensation costs.
“Returning retail margins to more normal levels could usefully help alleviate inflationary pressures on some consumer products, given retail gross margins account for about 30 percent of total sales,” Brainard said, according to a transcript of her remarks.
Some Congressional Democrats have talked about imposing price controls or taxing windfall corporate profits, but lawmakers have largely left the inflation fight entirely to the Fed.