The Fed’s Soft Landing Rests on the Labor Market Doing Something Weird

The Federal Reserve’s hopes for a “soft landing” hinge on a rare phenomenon: Unemployment will rise not because workers lose their jobs, but because more jobless people start looking for work.

Typically, the unemployment rate rises because a downturn in the economy causes a wave of layoffs. This hurts household spending, setting in motion a dynamic that can feed itself and plunge the economy into recession.

This time around, many forecasters expect the labor force participation rate to rise as people who have stopped working during the pandemic return to the labor market, just as employers slow hiring in the face of higher interest rates.

If that were to happen, it could put downward pressure on revenue and spending without causing a serious downturn — the very definition of a soft landing.

Such a scenario would represent a break with past labor market patterns and mark another unusual legacy of a once-a-century pandemic for the economy. And that could give the US central bank, which has been raising rates rapidly to rein in high inflation for decades, the license to keep them higher for longer if that happens.

“The norm is that the Fed pushes the economy into recession, you get layoffs, and that puts upward pressure on the unemployment rate,” said Jonathan Millar, senior economist at Barclays Plc in New York.

The narrow path to a soft landing “really hinges on its perfection: being able to avoid a decline in real employment and restore balance to labor markets by simply threading the needle”, he said. he declares.

The unemployment rate in the United States – which includes those who have lost their jobs and are looking for a new one, as well as those who may have left the labor force for various reasons and are looking for work again – has fallen to 3 .5% in July. , corresponding to the pre-pandemic trough. But the participation rate – which includes both employees and job seekers – at 62.1%, is still more than a percentage point below its February 2020 level.

Part of the difference is explained by the aging of the population. Many also retired earlier than expected at the start of the pandemic and are unlikely to return to work.

But the participation of young workers has not recovered either. The rate for people aged 25 to 54 – those “of working age” – is 82.4%, compared to 83.1% before Covid. The rate for 16-24 year olds is 55.2%, down from 57% before the pandemic.

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