Inflection point

Ever since the Federal Reserve began jacking up interest rates more than two years ago, Chair Jerome Powell made clear that the central bank not only wanted to rein in skyrocketing inflation. It also wanted to restore some balance to a labor market where demand for workers coming out of the pandemic was far outstripping supply. At least on that latter score, Powell seems ready to declare "mission accomplished." After the Fed held interest rates steady this month for its seventh straight meeting, Powell told reporters that labor market conditions had returned to about where they were on the eve of the pandemic. Thanks in part to a surge in immigration, the rebalancing has occurred without much of a rise in unemployment even as job openings have come down. Sources: US Bureau of Labor Statistics, Bloomberg Now, though, the labor market is reaching what Goldman Sachs Chief Economist Jan Hatzius calls a potential "inflection point," where a further material softening in demand for workers will hit job holders, not just job openings. That, in turn, could result in a significant rise in unemployment, according to Hatzius. That poses a bit of a dilemma for Powell and the Fed. With inflation still running markedly above the central bank's 2% target, monetary policymakers are reticent about cutting rates just yet. Indeed, they penciled in just one rate reduction for 2024, according to the median forecast in projections released this month. That's down from the three cuts in 2024 they foresaw in March. The labor market, meanwhile, is showing some signs of softness. Unemployment rose last month to its highest level in more than two years, though it remains historically low. Continuing claims by workers for unemployment insurance benefits have risen for seven straight weeks and stand just shy of their highest reading since the end of 2021. With the job market back to pre-pandemic levels, the danger is that the incipient weakness could turn into something far worse the longer the Fed keeps credit tight.