The Federal Reserve (Fed), the United States’ central bank, plays a crucial role in the country’s economic health through its ability to manipulate interest rates. Recently, the Fed has been increasing interest rates in an attempt to bring down the sky-high inflation rates. So, what impact does this have on unemployment?
To control inflation, the Federal Reserve typically raises the target range for the federal funds rate. At its recent meeting, the Federal Reserve Committee decided to maintain this range at 5 to 5-1/4 percent after 10 consecutive rate hikes [1][2].
Due to ongoing labor shortages, unemployment rates remain at near record lows and labor costs and inflation have continued to rise [1][2]. In its continued effort to drop inflation to 2%, the Federal Reserve has hinted at a possible rate hike in July [2].
The connection between the federal funds rate and unemployment hinges on business investment. High interest rates make borrowing more expensive, leading businesses to cut back on investment. This often translates to slowed economic growth and an uptick in unemployment. Moreover, as the job market softens, consumers have less money to spend, further slowing the economy.
Despite the higher return on savings and cost of borrowing, Americans continue to accumulate more debt to support spending. If we see a shift in behavior towards cutbacks in expenditures due to the higher cost of borrowing, this could further impact corporate revenue leading to hiring freezes and layoffs.
Despite the low unemployment statistics, we are seeing increased rumblings on LinkedIn from job candidates who are finding it harder than expected to land that next job. Also, we are noticing that clients are finally filling many hard-to-fill job openings, All this signals that the Federal Reserve’s rate hikes may be starting to impact on the labor market.
We expect that the Fed’s rate hikes will elevate unemployment rates. While the primary objective is to curb inflation, a delicate balance must be struck to avoid significant disruptions in the job market. We will continue to watch the market with great interest to see how this ultimately affects the labor market and wages.
Understanding the relationship between the Federal Reserve rates and unemployment is not just crucial for economists and policymakers but also for everyday citizens. It enables us to understand the economic dynamics that directly influence our livelihoods and financial wellbeing. With this knowledge, we can make informed decisions and be better prepared for the future.