UNC Professor: US jobs report means Fed may have ‘no choice’ but to ‘engineer a recession’

CHAPEL HILL – Friday’s US jobs report will put pressure on the Federal Reserve to raise interest rates even further, even after the fourth consecutive 75-basis point increase that was announced on Wednesday.

That’s according to Christian Lundblad, senior associate dean for faculty and research & the Richard “Dick” Levin distinguished professor of finance at the UNC Kenan-Flagler Business School, who spoke at a virtual briefing on Friday morning.

“There’s every reason to imagine that the Fed will continue to move,” said Lundblad.  “Not only were we surprised at the number of jobs created, we received an upward revision.”

The latest data from the U.S. Bureau of Labor Statistics showed that the U.S. economy added 261,000 jobs in October, much higher than expectations.  Further, the September 2022 figures were revised upwards, from 263,000 jobs added to 315,000 added jobs to the economy.

Combined, that’s 123,000 more jobs than were expected.

“We’re continuing to see pretty healthy job growth,” said Lundblad.  “Isolated to some sectors more than others.”

Despite headlines coming from Twitter and other technology companies that announced layoffs this week, Lundblad noted that “this looks like a pretty healthy jobs report.”

Still, though the report does come in stronger than expected, it “has not significantly moved markets, this morning,” Lundblad noted.

US added 261,000 jobs in October

What will the Fed do now?

Ultimately, the question we’re facing is whether the Federal Reserve will have to “engineer a recession,” said Lundblad.

That’s because even with last month’s increase in the unemployment rate, the U.S. economy is at a historically low level of unemployment, as labor force participation still lags behind pre-pandemic levels.

“The labor force participation rate falls very modestly, this month,” said Lundblad. “That’s in the wrong direction.”

But, prime-age labor force participation rate may still show strong employment.  Rather, the participation rate of those above 55 years old may never recover, said Lundblad, following the COVID-19 pandemic and the shifts in the labor market that resulted from it.

While unemployment rate of 3.7% is still “really, really, remarkably low, and still a very robust labor market,” said Lundblad, the Federal Reserve may need to “take the froth off the labor market” in order to see inflationary pressures recede.

“Do the wage and inflationary pressures we see as a consequence leave the Fed no choice, where they’ll have to engineer a recession?” asked Lundblad.

“An exciting labor market in some ways, and it is great that Americans are employed,” said Lundblad.  “But the Fed may be forced to act, and in a way, that puts some future pressure on where the economy might go.”

Fed makes history with fourth consecutive three-quarters point rate hike

What happens now?

The CME FedWatch Tool shows that traders and analysts have already changed their expectations, slightly, as a result of today’s jobs report.

Following Wednesday’s announcement that the Federal Reserve would raise interest rates by three-quarters of a percent, or 75-basis points, there was an expected about 47% probability that at the December meeting, the Federal Reserve would raise rates by another 75-basis points, and an about equal probability of a 50-basis point increase.

Now, though, both of those probabilities have increased, following Friday’s jobs report.  Now, there’s a 52% chance of a 50-basis point increase and a 48% chance of a 75-basis point increase, according to the CME FedWatch Tool.

But just because the Federal Reserve has made four consecutive 75-basis point increases in 2022, and another increase in December is expected, doesn’t mean that the Federal Reserve will be finished increasing the federal funds rate, said Lundblad.

“The peak is going to have to be well above 5%,” he noted.

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