For many years after the Great Recession, the Federal Reserve did everything in its power to drive down the unemployment rate. Now the central bank is trying to do the exact opposite.
David Rubenstein, billionaire investor and co-founder of The Carlyle Group
(GC)told CNN last week the Fed is actively trying to push up the unemployment rate to keep inflation under control.
“He can’t quite say that, but if the unemployment rate goes up to 4% or 5% or 6%, inflation [probably] be a little tame,” Rubenstein said of Fed Chairman Jerome Powell, whom he hired a quarter century ago to work in private equity, “but he can’t come out and say, “I hope the unemployment rate will rise to 6%. It doesn’t sound very politically appealing to say that.
Fed officials have warned that the labor market is too strong right now and is contributing to the very high cost of living. To calm inflation, the Fed is raising interest rates at the fastest rate in decades. The objective is to ease the demand for labour, which would rebalance the job market and reduce the pressure on prices.
The unemployment rate fell in July to 3.5%, tied with the lowest level since 1969. The jobless rate jumped to 3.7% in August, but for a healthy reason: hundreds of thousands of ‘Americans have retired to actively seek work.
But a jump in the unemployment rate towards 6% would result in a major wave of layoffs.
“There will be a lot of job losses. The Fed isn’t going to publicly say, “We want job losses,” said Rubenstein, who interviewed top investors for his new book, “How to Invest: Masters on the Craft.”
If the Fed attempts to slow the economy to the point where inflation drops back to its 2% target, it would result in the loss of 5.3 million jobs and the unemployment rate would rise to 6.7%, an analysis has found. from RSM, an accounting and consulting firm.
Powell, in a high-profile speech at the Jackson Hole economic symposium last month, said the Fed will “forcefully” use its policy-making tools to rein in inflation – a strategy that will bring “a bit of pain.” to households and businesses.
“These are the unfortunate costs of reducing inflation. But a failure to restore price stability would cause far greater pain,” he said during his speech.
However, there is little evidence that layoffs are becoming widespread. Weekly jobless claims fell last week to a two-month low. The number of job cut announcements made through August is the lowest since 1993, according to outplacement firm Challenger, Gray & Christmas.
Nevertheless, economists continue to warn that the US economy is at high risk of a recession, if not this year, at least in 2023 and 2024.
“Nobody knows for sure, and I don’t like to use the word ‘recession,'” Rubenstein said. “When I worked in the White House under President Carter, the inflation adviser there was told not to use the R-word. Recessions scared people. So he came up with another word: banana.
The Carlyle co-founder said he wasn’t sure if the economy was headed for a ‘banana’ or not – but it wouldn’t be the end of the world if that happened.
“We are not likely to enter a deep recession like the one we experienced in ’07-’08. I see no sign of that,” Rubenstein said. “And it’s not depression. You know, it will be a modest recession, if it occurs. I don’t know if that will happen.
Rubenstein noted that economic downturns present opportunities for investors who can buy good companies at great value.
“There will always be recessions, but that’s where the big fortunes are made,” he said.
Rubenstein isn’t convinced the worst is over for US stocks, which plunged into a bear market in June but have since rebounded. Still, he pointed out that it was very difficult to time the market precisely and suggested investors not waste too much time trying.
“I don’t think we’ve hit bottom, absolute bottom, but we’re kind of close to bottom in some areas of technology,” Rubenstein said. “You never know when it’s really rock bottom. But if it drops another 10%, what difference does it make? If you buy something now and it drops 10% and then rises 30% later, what difference would it make if you bottomed out? »
Even though recent indicators show that inflation is beginning to subside, Rubenstein warned that it will be “years” before inflation gets back down to the level of 2% sought by the Fed.
“I don’t think you can raise interest rates enough to bring the inflation rate down very quickly. It takes time, especially when we have a war in Ukraine,” he said. “The Fed recognizes that once you have inflation in the system, as Paul Volcker said, it’s very difficult to get it out.”
Some economists have suggested that the Fed could shift inflation targets, revising its inflation target from 2% to the more accessible level of 3%.
Rubenstein, however, doesn’t think it will be anytime soon.
“It would scare the markets away,” he said. “They would say, ‘That means the Fed doesn’t think it can get to 2%. This means that inflation is going to be higher for a while. It would scare people. »
Powell and his colleagues at the Fed insisted that inflation would be “transient,” before admitting late last year that it would not. Russia’s invasion of Ukraine worsened the situation this spring, sending food and energy prices skyrocketing.
Rubenstein praised Powell as a “very smart and hard-working person” but said the Fed chairman (and others) “underestimated” how bad inflation would be.
“We sometimes think of Fed chairs as people who are gods,” Rubenstein said. “Alan Greenspan was almost a god. Paul Volcker was almost a god. But these people put their pants on one leg at a time. They make mistakes.