A man walks past the Federal Reserve in Washington, December 16, 2015. REUTERS/Kevin Lamarque/File Photo
Yet this mechanism appears to have broken down. With the Fed funds rate at a 17-year high of 5.25%, unemployment of 3.6% is around the same level as before the pandemic, while GDP is growing at a healthy 2% a year. Yet inflation is falling: U.S. consumer prices only rose 3% year-on-year in June.There are two main explanations for the U.S. economy’s robust performance.
A second possibility is that the link between higher interest rates and job losses has broken down, partly because companies are “hoarding” labor as they anticipate the next upturn. It could also be that higher interest rates weigh on prices by pushing up borrowing costs and weakening financial markets, without requiring widespread layoffs.
The latest hiring data suggests there’s plenty of room for the central bank to keep lifting rates. The United States has nearly 10 million job openings across the country, 3 million more than before the pandemic. Hiring, too, remains robust: the 209,000 increase in payrolls in June matches the pre-crisis monthly average.