The Concentration of the Federal Reserve on the Labor Market

During his talk at the Brookings Institution in Washington, DC, on November 30, Federal Reserve (Fed) President Jerome Powell signaled a modest increase in the US basic interest rate as a choice for the next FOMC meeting on December 14. 

This will take place on December 14. After four meetings in a row with hikes of 75 basis points each, expectations have now converged on an increase of only 50 basis points this time. The basic rate would finish the year in the range of 4.25% to 4.5% per annum, having begun the year at a level very close to zero in March of that year.

On the other hand, Powell remarked that inflation in the United States is still at a high level. He gave an estimate that stated that inflation in personal consumer spending had been running at a rate of 6% per year up until the month of October. 

In order to reduce inflation down to 2% on an annual basis, interest rates will need to be raised to more restrictive levels. It was noted that there is still more territory to cover by the Fed, which means that there would be some extra increase of interest rates in 2023. He also mentioned that there is still more ground to cover by the Fed.

He stated that the goal of monetary tightening is to reduce the rate of increase in aggregate demand in comparison to total supply, which will necessitate a prolonged period of economic growth in the United States that is lower than average. 

In spite of the slowdown in economic expansion this year and the tightening of monetary policy, he did not observe any obvious success in the fight against inflation.

During his address, Powell split his attention between inflation and the state of the labor market. The rationale behind this was made clear when he discussed the three primary factors that contribute to the rate of inflation: products, housing, and services that are not related to housing (Figure 1). 

The underlying inflation of products has been falling from high levels throughout the year, but the cost of housing services has been steadily climbing at a pace of 7.1% in the most recent twelve months. Powell, on the other hand, brought up the significant slowdown in the rate of price increase for new leases that has occurred since the middle of the year.