WASHINGTON: The US Federal Reserve stated that since the likelihood of an economic "soft landing" has diminished, the nation needs a "growth recession" to control inflation. The apex bank stated that while it will cause some discomfort, allowing inflation to remain high is worse.
A period of below average growth, rising unemployment, and sluggish inflation is known as a "growth recession." While it would "bring some pain," the Fed chair argued that allowing inflation to remain high would be worse. In a perfect world, the Federal Reserve has already beaten inflation from the pandemic era, kept the unemployment rate at historic lows, and prevented a recession. The Fed has turned to plan B since hopes for such a result are all but completely crushed.
The central bank delivered a straightforward and direct message at its annual conference this year in Jackson Hole, Wyoming. You may recall that Fed Chair Jerome Powell cautioned that lower inflation will "bring some pain" to Americans through layoffs, weaker wage growth, and higher borrowing rates in remarks that lasted less than 10 minutes on August 26.
While the negative effects are "unfortunate," failing to control price growth and restore normalcy "would cause far more agony," he claimed. Powell dispelled the notion that the US can experience a "soft landing," in which the Fed can raise inflation to its goal rate of 2% without raising unemployment. To reduce American demand and curb inflation, the central bank has been hiking interest rates at their quickest rate since the 1980s.
Powell's clarification that more rate increases are forthcoming significantly diminished hope for a soft landing. The potential of a "growth recession," which denotes a period of sluggish economic growth and rising unemployment, has taken its place.
It's not quite stagflation because that scenario also calls for high inflation, thus it doesn't apply here. However, it's a forceful method to stop inflation, and Powell's comments suggest that the Fed is using it as a result of more than a year of faster-than-average price growth.
In a Wednesday analysis of Powell's speech and the direction of things to come, the Business Insider stated that Americans who are preparing to return to the labour market and hunt for a new job will bear the brunt of the pain. The Chair had previously stated that "reducing inflation is likely to require a sustained period of below-trend growth," and that "there very likely be some weakening of labor-market conditions."
Job losses will be greatest during a growth recession. Powell has mentioned the enormous mismatch between the supply and demand of labour as one of the reasons why the Fed has made the labour market one of its primary fronts in the fight against inflation.
According to government data released last week, there are still almost two job opportunities for every worker available in the US, highlighting how competitive the labour market has grown.
For many working Americans, "softening" that sector of the economy would result in significant discomfort. As businesses turn their focus to cost-cutting and profit protection, higher interest rates typically slow down their employment plans. Smaller pay increases may result from a decline in the demand for workers because businesses won't need to hire as aggressively.
If enough businesses cut staff in order to strengthen their balance sheets, a growth recession may even cause the unemployment rate to rise dramatically. The rate is at 3.7%, barely rising from the pre-pandemic level over the previous five decades. The Insider cautioned that a sudden decline in labour demand might leave Americans without jobs at a time when businesses are no longer hiring as quickly as they did over the past year.It would be difficult to reduce inflation without "starting a recession," according to Joe Brusuelas, chief economist at the consulting firm RSM US, and the loss of 5–6 million jobs.
According to Brusuelas, "it is about as close as one may go to what can reasonably be considered a soft landing." The economies of the mid-1980s and mid-1990s provide some insights into the characteristics of growth recessions. The former came after a historic period of inflation that necessitated record-high interest rate increases from the Fed, which was then led by Paul Volcker. While doing so helped to slow price increases, the economy only grew slightly below trend. The unemployment rate didn't spike, but it remained for a while at high levels before starting to decline again.
Similar characteristics of the mid-'90s economic expansion were reducing inflation, below-average growth, and persistently high unemployment. Both growth recessions were followed by solid economic expansions, although they were nonetheless marred by the events of a few years before.
According to The Insider, the newest growth recession has already begun, citing employment data released on Friday that provided the first indication that the economy had entered a period of weak growth and rising unemployment. In August, the economy added 315,000 jobs, marginally exceeding the average projection but notably slowing from the gain of 526,000 nonfarm payrolls in July. The gains for June and July as a whole were revised down by 107,000 jobs. The August data suggests that the months of above-trend growth are coming to an end, despite the fact that job creation is still going strong.
Unemployment rates did increase, although this was due to a positive trend. The Insider said that the labour force participation rate, which measures the percentage of Americans who are employed or actively looking for work, crept up last month to 62.4% from 62.14% in July, indicating that more workers entered the labour market.
Since the headline unemployment rate only includes Americans who are actively looking for job, the increase in participation raised the indicator. Nevertheless, the jobs report perfectly reflects the type of economy that the Fed wants to foster. Increased borrowing rates would hinder employment growth even more, especially when they reach levels that are deemed constrictive to the economy as a whole. A decrease in the need for workers would also affect the rate at which newly enrolled Americans might find employment.
There will probably be higher unemployment, lower inflation, and a period of below-potential growth as a result of the "softening" Powell said.
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