Central bankers have raised interest rates considerably in an attempt to slow inflation. To date, the Fed has raised its benchmark interest rate five times this year. While business activity is slowing, it is not falling off a cliff. Employers continue to hire, wages are rising, and inflation is stubbornly sticking around.

While the job market might be cooling slightly, the main question for business owners, policy makers and economists is how cool does the job market need to be for the Fed to ease up on their aggressive interest rate hikes? Jerome H. Powell, chairman of the Fed, has acknowledged that the fight against inflation could be a painful process. Higher interest rates offset inflation by making it more expensive to borrow money, discouraging both consumption and business expansions, potentially bringing down wages and raising unemployment. 

That central bank has emphasized that it has an obligation to get inflation back in check. The two main economic goals of the Fed are maximum employment and stable inflation around 2 percent. While unemployment is currently very low, prices are increasing at more than three times the Fed’s target rate of 2 percent (2%). 

Despite the continued aggressive rate hikes, some economists remain hopeful that the Fed will still manage to achieve a so-called soft landing: Fed officials want to adjust policy with enough strength to bring inflation under control but without tipping the economy into a recession. A recession can be defined as a sustained period of weak or negative growth in real GDP (output) that is accompanied by a significant rise in the unemployment rate. 

The national unemployment rate is extraordinarily low at 3.7%. With the high amount of jobs available in today’s labor market, economists are forecasting that unemployment will remain relatively low. According to the US Bureau of Labor Statistics, the number of job openings as of September 30, 2022, increased to 10.7 million, which means that there are plenty of jobs available for people who want to work. Therefore, it does not appear that unemployment will rise anytime in the near future. Furthermore, while the GDP had a negative growth rate for the first two quarters of 2022, it did have a 2.6% increase in the 3rd quarter. Low unemployment and a positive GDP are factors pointing toward a relatively soft landing in the Fed’s fight against inflation. 

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