Fed projects jobless rate to reach 4.5 percent by end of 2023

Federal Reserve officials expect the unemployment rate to reach 4.5 percent by the end of 2023 as interest rate hikes slow the economy, according to projections released Wednesday. 

That’s an uptick from the current 3.6 percent unemployment rate, indicating that Fed officials predict that millions of Americans could lose their jobs this year as the U.S. economy grapples with higher interest rates and the aftereffects of a banking crisis. 

However, the jobless figure is lower than the Fed’s 4.6 percent estimate released in December. 

“The process of getting inflation back down to 2 percent has a long way to go and is likely to be bumpy,” Fed Chair Jerome Powell told reporters Wednesday after the Fed’s announcement. The Fed chief added that the new projections are “little changed” from estimates released in December and would not prevent the bank from adjusting course if economic conditions change.

The Federal Open Market Committee released its projections after the panel agreed to increase interest rates by 0.25 points to a range of 4.75 to 5 percent, in an effort to combat the persistent inflation. Price growth remained stubbornly high at a 6 percent annual rate in February, according to the Labor Department’s consumer price index.

Powell said Wednesday that economic data since the Fed’s last rate hike in January “have generally come in stronger than expected,” which he called a sign of steady momentum behind inflation.

The Fed’s projections show the baseline interest rate peaking at 5.1 percent by the end of the year — unchanged from its December projection — indicating that one more rate hike could be coming. The Fed said that “additional policy firming may be appropriate.” 

Fed officials expect inflation to fall to 3.3 percent by the end of the year and 2.5 percent by 2024. The central bank is targeting 2 percent inflation. 

Powell has insisted that the central bank must keep raising rates to reduce demand for goods and services and drive prices down. He’s acknowledged that the strategy will lead to weaker wages and more layoffs — and that the most vulnerable workers will be disproportionately impacted. 

“Reducing inflation is likely to require a period of below trend growth and some softening in labor market conditions. Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the longer run,” Powell said Wednesday.

The U.S. added 311,000 jobs in February, according to the most recent jobs report, above analysts’ predictions. Wage growth, a key indicator watched by the Fed, slowed to 0.2 percent in February, down from 0.3 percent in the previous two months and 0.6 percent in November.

Sen. Elizabeth Warren (D-Mass.) and other progressive lawmakers have urged Powell to pause rate hikes to stave off an economic downturn, arguing that inflation is driven by record corporate profits, not wage growth.

“If you could speak directly to the 2 million hardworking people who have decent jobs today, who you’re planning to get fired over the next year, what would you say to them?” Warren asked Powell during a March Senate Banking Committee hearing. “How would you explain your view that they need to lose their jobs?”

The financial sector is worried about rate hikes for different reasons. Analysts note that Silicon Valley Bank collapsed in part because its long-term securities such as Treasury bonds saw their value plummet due to higher rates. 

Regulators and banking executives are seeking to prevent contagion. First Republic Bank, a San Francisco-based regional bank that once had over $200 billion in assets, is seeking funding to stay solvent, even after it received $30 billion in deposits from large banks.

“Events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses, which would in turn affect economic outcomes. It is too soon to determine the extent of these effects and therefore too soon to tell how monetary policy should respond,” Powell said.

Goldman Sachs recently raised its recession odds from 25 percent to 35 percent, citing the economic effect of stress on small and midsize banks, which are go-to lenders for employers. The investment bank’s analysts hoped the Fed would pause rate hikes until banking worries subside.  

JPMorgan analysts said this week that the banking crisis makes a downturn likely and added that the Fed is “likely already past the point of no return” when it comes to rate hikes. 

— Updated at 2:59 p.m.