A top economist predicted that U.S. unemployment will rise and jeopardize the Federal Reserve's desire to avoid a recession.
Vanguard's Joe Davis told Bloomberg's "What Goes Up" podcast that while a spike in unemployment will suppress wage growth and help inflation fall to the Fed's target level of 2%, it will also ruin hopes for a "soft landing," where inflation falls without a recession or big job losses.
Business Insider reported that most banks expect unemployment to rise above 4% in the next 12 months as the Fed's interest-rate hikes affect the labor market.
"It's going to take some labor market weakness to go that last yard, as many call it, from 3% trend inflation down to 2%," Davis, Vanguard's chief global economist and head of investment strategy, told Bloomberg.
"Almost everyone has a rise in the unemployment rate of at least 30 or 40 basis points, so going above 4% over the next year. Well, historically, that has been 100% associated with a recession — now, not necessarily deep in magnitude, but a recession."
The Federal Reserve last week raised interest rates by a quarter of a percentage point, citing still elevated inflation as a rationale for what is now the highest policy rate in 22 years.
The rate hike, the Fed's 11th in its past 12 meetings, set the benchmark overnight interest rate in the 5.25%-5.50% range. That's up from near zero in March 2022.
"Semantically, they're [the Fed] on record saying no recession," Davis told Bloomberg. "But by that metric, it actually is a recession — because you have very modest job losses."
Inflation has fallen from four-decade highs to just 3%. Also, job numbers and the country's GDP have been inching up despite rising borrowing costs.
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