According to recent estimates from a team of researchers that included two staff economists from the International Monetary Fund, the U.S. unemployment rate may need to go to as high as 7.5% in order to stop the nation’s outbreak of high inflation.
The analysis concluded that only under “very optimistic assumptions” about the behavior of the U.S. labor market and inflation would the U.S. fed be able to calm present pricing pressures with smaller damage to employment. This would result in job losses of perhaps 6 million people. According to Fed experts’ median projections from June, the unemployment rate would only need to increase to 4.1% by the end of 2024 for inflation to start to return to the central bank’s objective of 2%. In August, the unemployment rate was 3.7%.
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In a description of the study that was provided as part of a Brookings Institution economic conference, Laurence Ball, a professor of economics at Johns Hopkins University (NYSE:BALL), stated that the little increase in unemployment the Fed anticipates won’t be sufficient if the labor market or (inflation) expectations don’t behave. Either inflation stays significantly higher, or unemployment rises and the economy slows down significantly.
The report, which was co-authored by IMF economists Daniel Leigh and Prachi Mishra, is a part of a growing discussion over how much economic “pain,” as Fed Chair Jerome Powell recently put it, may be required to stop the worst outbreak of inflation in the United States since the 1980s. Since that time, when Paul Volcker, the then-Chairman of the Federal Reserve, used a severe crackdown on credit to stop consumer price increases that were once exceeding 14% annually, the central bank has been raising interest rates at the fastest rate possible. Success, however, came at the expense of a recession and an unemployment rate above 10% as businesses reduced workforces to cope with the slowing economy.
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