The Federal Reserve is worried that once the unemployment rate rises, it will “get out of control” and that if the job market deteriorates rapidly, it will cause interest rate cuts. However, “Red Voter Waller,” who won a big victory in the “Beveridge Curve dispute,” believes that the unemployment rate will not rise as usual, and the Federal Reserve should not rush to cut interest rates.
Powell's unexpected statement last week quickly gave a strong shot to the market and boosted the sharp rise in US equity and bond exchange. And apart from being interpreted as a possible further relaxation of the financial environment, what did he say? It's about the unemployment rate.
Powell said at a press conference last Wednesday that a clear recovery in the unemployment rate may cause the Federal Reserve to lower interest rates. Afterwards, he repeated this view several times in response to questions from reporters.
He stressed that although the Federal Reserve aims to ensure that interest rates are cut after overcoming inflation, “policy measures may also be needed to deal with the unexpected weakness in the job market.” Even though there are no hidden concerns that may arise in the job market, some economists are not very optimistic. They believe that unemployment has risen markedly in some states, and that the number and hours of temporary work are declining.
This has led the Federal Reserve to worry that the apparently stable job market could deteriorate rapidly. Because historically, once the unemployment rate starts to rise, it “gets out of control.” And as more companies join the ranks of layoffs, the unemployment rate will rise sharply.
However, Powell also added that in a situation where the “number of first-time applicants for unemployment benefits” is very low, he doesn't think the risk of a “rapid rise” in the unemployment rate will occur.
The latest economic forecasts from Federal Reserve officials show that the unemployment rate will rise in 2024, but not by much. The median forecast shows that the average unemployment rate for the fourth quarter of 2024 will rise to 4% from the two-year high of 3.9% in February.
The Federal Reserve's “Red Ticket Committee” Waller echoed this view from another perspective.
Wall Street heard this earlier. Waller, who won a big victory in the “Beveridge Curve Dispute,” said that the cooling of the labor market will be achieved to a greater extent by reducing job vacancies, thus preventing the unemployment rate from being significantly affected.
In other words, Waller believes that tight monetary policies will make companies tend to slow down recruitment rather than fire employees. And this could lead to a drop in job vacancies, and the unemployment rate will not rise as usual. Therefore, he said at the beginning of this year that the Federal Reserve should not rush to cut interest rates.
He also stressed that if the vacancy rate does not stabilize but instead falls below 4.5%, the unemployment rate may rise sharply.
However, it is worth noting that the real Beveridge curve is definitely not as smooth as the model. Once there is a trend to reduce consumption and investment, the slope of the Beveridge curve will quickly flatten out, and the risk of layoffs will increase significantly.
Editor/Somer