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By Christopher Rugaber<\/div><\/div>\n

The chair sees the job market\u2019s strength as a key driver of rising prices \u2013 but it may let employers curtail costs by reducing job openings instead of layoffs. <\/span><\/span><\/p>\n<\/div>\n

WASHINGTON (AP) \u2013 Chair Jerome Powell isn\u2019t as pleased with the robust U.S. job market as you might think he\u2019d be, and he and the Federal Reserve plan to do something about it: Take it down a notch.<\/span><\/span><\/p>\n

On Thursday, Powell described the job market as \u201cextremely, historically\u201d tight and \u201cunsustainably hot.\u201d Available jobs are near record highs. Wages are rising at their fastest pace in decades. The unemployment rate is flirting with a half-century low, and layoffs are sparse.<\/span><\/span><\/p>\n

Yet Powell doesn\u2019t see all of this as purely a cause for celebration. With the highest inflation in four decades hurting households and businesses, the Fed chair regards the job market\u2019s strength as a key driver of spiking prices.<\/span><\/span><\/p>\n

But Powell is also betting that that very strength will give the Fed an unusual opportunity to cool the economy and fight inflation without derailing the job market or causing a recession. The Fed hopes to reduce the huge number of job openings, rather than spur layoffs. Fewer available jobs, in turn, would slow wage increases and help tame inflation.<\/span><\/span><\/p>\n

On Thursday, in a panel discussion held by the International Monetary Fund, Powell said the Fed\u2019s goal is to get the job market to \u201ca better place.\u201d<\/span><\/span><\/p>\n

What\u2019s better than really hot? And what would it mean to get there?<\/span><\/span><\/p>\n

Start with the huge number of open jobs \u2013 11.3 million at last count. That\u2019s clearly a boon to anyone seeking a better job. For employers, though, all those openings are a source of continuing frustration because a worker shortage has made them hard to fill.<\/span><\/span><\/p>\n

As Powell and the Fed see it, the surge in job postings forces employers to boost wages to attract and keep workers. Those higher labor costs are then passed to customers in the form of higher prices, thereby helping fuel inflation.<\/span><\/span><\/p>\n

But this time, with so many open jobs, the Powell Fed is figuring that most employers will respond by cutting back on job postings, rather than laying off people. Fewer openings would reduce their need to raise pay and would ease inflationary pressures.<\/span><\/span><\/p>\n

If it works \u2013 a big if \u2013 this would help Powell achieve the elusive \u201csoft landing\u201d that Fed chairs seek when the economy is growing too fast but that they rarely achieve when inflation is as high as it is now.<\/span><\/span><\/p>\n

Economists are generally skeptical that the Fed can successfully thread that needle. But given the job market\u2019s strength, they also say it\u2019s a possibility.<\/span><\/span><\/p>\n

\u201cWe have enough space to cool off, but not go cold,\u201d said Claudia Sahm, senior fellow at the Jain Family Institute and a former Fed economist.<\/span><\/span><\/p>\n

In his remarks Thursday, Powell pointed to a key figure underlying the Fed\u2019s approach: There are about 5 million more jobs \u2013 including both filled and unfilled \u2013 than there are unemployed people to fill them. That gap is the largest it\u2019s been since World War II, according to economists at Goldman Sachs.<\/span><\/span><\/p>\n

\u201cWe\u2019ve got a demand-supply imbalance in the labor market,\u201d Powell said. \u201cIt\u2019s our job to get to a better place where supply and demand are closer together.\u201d<\/span><\/span><\/p>\n

The Fed\u2019s rate hikes are intended to achieve that balance. Last month, the central bank raised its benchmark short-term rate for the first time in more than three years, by a modest quarter-point, to a range of 0.25% to 0.5%. Economists expect the Fed to raise rates by a more aggressive half-point at each of its next three meetings. That would amount to the fastest tightening of credit since 1994.<\/span><\/span><\/p>\n

The Fed\u2019s moves have already contributed to higher borrowing costs for home mortgages, auto loans and credit cards. Those higher costs could slow consumer spending and, the Fed hopes, convince businesses that they don\u2019t need to hire so many people.<\/span><\/span><\/p>\n

\u201cThe key to a soft landing is to generate a slowdown large enough to persuade firms to shelve some of their expansion plans, but not large enough to trigger sharp cuts in current output and employment,\u201d economists at Goldman Sachs wrote this week.<\/span><\/span><\/p>\n

At a news conference last month, Powell suggested that the job market had strengthened \u201cto an unhealthy level\u201d and noted that there were about 1.8 jobs available for every unemployed person. If the ratio of openings to the unemployed evened out to something closer to 1 to 1, he said, \u201cyou would have less upward pressure on wages.\u201d<\/span><\/span><\/p>\n

For now, average hourly wages are rising at about a 5.5% annual pace, the sharpest pace in four decades. Economists estimate that if the gains slowed to 3% or 4%, it would reduce inflation by roughly 2 percentage points.<\/span><\/span><\/p>\n

The Fed\u2019s preferred measure of inflation is at 6.4%, partly because of supply shocks that have sharply raised the cost of gas, food, autos and many other goods and components. Those increases won\u2019t be affected much by the Fed\u2019s actions. Still, many economists expect an easing of supply chain snarls to help reduce inflation this year.<\/span><\/span><\/p>\n

With workers switching jobs in record numbers, Sahm said some companies are likely posting extra openings to build \u201can inventory of workers\u201d to ensure that they can meet customer demand. That might not be necessary if spending slows, she said, making the Fed\u2019s approach feasible.<\/span><\/span><\/p>\n

And many employers may be more reluctant to lay off workers after having had trouble rehiring people after the pandemic recession. The number of laid-off workers receiving unemployment aid has reached its lowest level since 1970.<\/span><\/span><\/p>\n

\u201cBusinesses are holding onto workers harder than ever,\u201d said Sarah House, an economist at Wells Fargo. \u201cLabor shortages have become a more persistent issue.\u201d<\/span><\/span><\/p>\n

Goldman Sachs has calculated that the gap between total jobs, including openings, and workers, would need to fall by half \u2013 or 2.5 million \u2013 to slow wage increases and inflation. Some of that reduction could occur as Americans who had dropped out of the workforce during the pandemic return and take jobs.<\/span><\/span><\/p>\n

Yet a drop of that magnitude has never happened outside a recession, Goldman said, or without large increases in unemployment.<\/span><\/span><\/p>\n

Still, Goldman\u2019s economists put the odds of a recession only at about one-third over the next two years.<\/span><\/span><\/p>\n

Ryan Sweet, an economist at Moody\u2019s Analytics, said that with businesses and households in solid financial shape, with more savings and less overall debt than before the 2008-2009 Great Recession, any economic slump would likely be brief.<\/span><\/span><\/p>\n

\u201cIf the Fed pushes the economy into recession, it\u2019s probably going to be a mild one,\u201d Sweet said.<\/span><\/span><\/p>\n

Copyright 2022 The Associated Press, Christopher Rugaber, AP economics writer. All rights reserved. This material may not be published, broadcast, rewritten or redistributed without permission.<\/span><\/span><\/p>\n<\/div><\/div>\n

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