Olivier Blanchard : “Fed Splits the Difference on Labor Market Pain”

ARTICLE – Analysis by Jonathan Levin | Bloomberg

The Federal Reserve is inching toward acknowledging how painful its inflation fight is likely to be, but it’s still a lot closer to the optimists than the pessimists.

On a day when it raised interest rates by 0.75 percentage point to a range of 3% to 3.25%, the Fed also released economic projections showing that its median forecast for unemployment is 4.4% by the end of 2023, up from the current 3.7%, meaning more than a million fewer jobs as a result of its campaign. That marked an increase from previous projections in June that showed unemployment peaking around 4.1%, which were widely panned as unrealistic. Yet the numbers still look rosy compared with the labor-market damage that historically accompanies rounds of aggressive monetary policy tightening.

For the Fed, the projections are a balancing act between economics and public relations. The central bank is fighting the worst inflation in four decades, and economic orthodoxy suggests that the overheated labor market is creating upward pressure on wages and consumer prices. As that thinking goes, the only way to break the cycle is to send unemployment higher — a barbaric principle on the face of it that many Americans would deeply object to if they could see through the opacity of the central banking process and its web of economic jargon. Yet for better or worse, there’s virtually no hope that policy makers will concoct a better way of tackling inflation anytime soon.


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