With the Fed’s latest rate hike, the “pain” that Chair Powell has been warning about will take many forms, including job losses, which the central bank chief euphemistically calls “softening in the labor market.”
Critics such as Senator Elizabeth Warren have repeatedly called out the risk of raising unemployment, which is currently near historic lows at around 3.7%. When interest rates go up, business activity slows, leading to less hiring and more layoffs. The Fed now expects unemployment to reach 4.4% next year, which would amount to more than 1.3 million jobs lost.
“Chair Powell just announced another extreme interest rate hike while forecasting higher unemployment,” Warren tweeted. “I’ve been warning that Chair Powell’s Fed would throw millions of Americans out of work — and I fear he’s already on the path to doing so.”
Powell reiterated in a news conference that the short-term pain is far preferable to the longer-term pain of letting inflation run rampant. Slower growth and higher unemployment “are all painful for the public that we serve, but they’re not as painful as failing to restore price stability and having to come back and do it down the road again,” he said.
To set the labor market up for another strong period, he added, we have got to get inflation behind us.
“I wish there were a painless way to do that. There isn’t.”