WASHINGTON, Feb 1 (Reuters Breakingviews) - The Federal Reserve is being relentless in its quest to bring inflation down to 2%, from its latest reading of 5%. This comes at a human cost. Between here and there, nearly 1 million more Americans could go jobless, based on the Fed’s own estimates. Given the vagaries of inflation psychology, it’s not clear the Fed is justified in being so single-minded.
Chair Jay Powell has stuck by his mission even as higher borrowing costs have squeezed households’ finances. Their spending fell in December by the most since February 2021, the U.S. Bureau of Economic Analysis said Friday. Nonetheless, markets expect the central bank to raise rates on Wednesday and again in March, according to economists polled by Reuters.
By the officials’ own forecasts, the inflation fight will hurt hundreds of thousands of workers. Projections published after the Fed’s December meeting suggest the view that by the time inflation returns to 2% in 2025, unemployment will have risen to 4%, from 3.5% in December. That’s equivalent to 800,000 people being put out of work.
The number rises, though, if people who left the workforce and stopped job-hunting during the pandemic come back into the fray. Assume the participation rate – or the share of Americans working or actively trying to – returns to where it was at the end of 2019, and that 4% unemployment would mean a total increase of 978,000 jobless people.
Inflation brings pain too, especially to less well-off households, but the trade-off isn’t simple. If the Fed stops hiking now, inflation may keep subsiding without companies having to cut payroll. In any case, the 2% number is more symbol than science. Inflation frequently rose above 2% in the 1990s. And Americans routinely overestimate how high inflation will run in the next year, according to the New York Fed, typically expecting around 3%.
Powell has so far shot down the possibility of relaxing the 2% target. Wednesday’s rate hike will show he’s serious, and markets may like to see central bankers who abide by their own rules. The workers who stand to lose out from the Fed’s false precision probably have different ideas.
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CONTEXT NEWS
The U.S. Federal Reserve was expected to raise interest rates by 25 basis points on Feb. 1 according to economists polled by Reuters, stepping down from the 50-point hike approved in December.
Projections published by the central bank at the December meeting showed inflation returning to 2% in 2025. Unemployment was seen settling at 4% after 2025, above the current level of 3.5%.
Prices across the United States rose 5% year-over-year in December, the Bureau of Economic Analysis said on Jan. 27.
