When the covid-19 pandemic led to millions of workers losing their jobs, the US federal government responded by increasing unemployment insurance benefits and sending stimulus checks to millions of households. These measures kept aggregate demand up and allowed the US economy to avoid a devastating recession.
Three years later, significant uncertainty exists in the US economy after two major bank failures led to the most intensive government intervention in financial markets since 2009.
Uncertainty and the possibility of a recession
This weekend, Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell released a joint statement in light of the news that financial giant UBS would purchase Credit Suisse and applauded “the announcements by the Swiss authorities today to support financial stability.” The statement struck an optimistic tone, noting that “the capital and liquidity positions of the US banking system are strong, and the US financial system is resilient.” These remarks come just days before the Federal Bank is expected to add 25 basis points (0.25 percent) to the Federal Fund Rate, the primary interest rate the Fed has control over.
Earlier this month, Chair Powell struck a more pessimistic view on inflation when testifying before Congress. During his opening remarks, he warned lawmakers that “the ultimate level of interest rates is likely to be higher than previously anticipated. But now, in addition to looking at prices and the labor market, the Fed will also need to consider the health of financial markets in light of the SVB collapse.
Goldman Sachs economist Jan Hatzius told The Hill that the investment bank sees a one in three chance that the US economy could enter a recession in the next year. The chance of a recession was increased by ten points to thirty-five percent directly after the two major bank failures. The risks of pushing up rates too high and too fast and dumping the economy into a painful recession will likely also be considered by the Fed officials.
The relationship between interest rates and employment as the risk of recession looms
Several leaders in Washington, and critics of traditional monetary policy, including Nobel Prize-winning economist Joseph Stiglitz, have raised doubts over whether the US central bank will stabilize prices without ripping millions from the labor market and sending the economy into a recession.
“Given the large and rapid increases in interest rates Powell engineered – probably the most significant since former Fed Chair Paul Volcker’s interest-rate hikes of 40 years ago – it was predicted that dramatic movements in the prices of financial assets would cause trauma somewhere in the financial system,” argued the economist in Project Syndicate.
Silicon Valley Bank was a major hub for venture capitalists who, through the institution, helped to fund around half of all tech start-ups operating in the US. Now, those smaller firms who cannot yet bring a product to market at a profit will have to look for another funding source or shut down their operation. With interest rates as high as they are, identifying new funding sources may not be such a simple task, and if they are unable to find one, these start-ups may have to start laying off their employees.
For Dr. Stiglitz, another group at risk of losing their jobs are “young nonwhite males,” who he calls attention to because their “unemployment rate is typically four times the national average.” Workers in this group, some of whom face discrimination in hiring and when they enter the workforce, often see disproportionate increases in their unemployment rate when the national figure ticks up. Such sudden reductions in the labor force could reduce demand and, subsequently, inflation, but at a high cost to see their job taken away.
Senator Elizabeth Warren has also raised concerns about the impact of rate increases on unemployment, warning that once the economy starts shedding jobs, it can be hard to stop. If too many jobs are lost, the economy runs the risk of falling into recession as demand falls to levels that force companies to scale back operations or even close.
The Massachusetts senator has reminded Chair Powell and other Fed officials to remember their duel mandate as they evaluate future rate increases and their possible impacts on workers.
How have interest rate increases impacted the US economy?
Last week, the Bureau of Labor Statistics (BLS) reported a slight increase in the unemployment rate in February, rising from 3.4 to 3.6 percent. Though the rate did increase, the number of “employed” workers grew by 177,000, from 160.13 million in January to 160.31 million in February. Last month was the first since October when the number of unemployed workers increased, a sign to the Federal Reserve that rate hikes may be softening the labor market. Latino and Hispanic workers saw unemployment rise 0.8 percent from January to February—the highest among racial and ethnic groups tracked by the BLS. Workers with a bachelor’s degree did not see any change in their unemployment rate, while the rates for workers without a high school diploma or a GED increased by 1.3 percent.
2023 Labor Situation
| January 2023 | February | Change | |
| Civilian noninstitutional population | 265,962,000 | 266,112,000 | +150,000 |
| Civilian labor force | 165,832,000 | 166,251,000 | +419,000 |
| Employed | 160,138,000 | 160,315,000 | +177,000 |
| Unemployed | 5,694,000 | 5,936,000 | +242,000 |
The BLS also released the February Consumer Price Index, which showed an average price increase of 0.4 percent, one point short of what was seen in January. While not what many economists hoped to see, the report highlighted that “shelter was the largest contributor to the monthly all items increase, accounting for over 70 percent of the increase.” While prices are still moving up, the pace has slowed significantly this summer; the year-over-year increase in inflation clocked in at six percent in February, compared to over eight percent this summer.
Nevertheless, with the Fed’s target of keeping inflation under two percent, increases between 0.4 and 0.5 percent would surpass that limit before June. What remains to be seen is how the Federal Reserve will respond to these new economic data points when officials agree to another rate hike.
Source : AS
