Federal Reserve Rate Increase: Impact on Unemployment

When The New York Times issued their recent report about the Federal Reserve raising interest rates, it contained an even more newsworthy note: two more increases will likely be coming this year. That’s right – the prevailing notion at the Fed is that the economy is sturdy enough for borrowing costs to go up multiple times in 2018.

Chairman Jerome H. Powell even indicated in the report that because things have stabilized sufficiently, the Fed will “soon step back and play less of a hands-on role in encouraging economic activity.”

Clearly, the Fed is optimistic. But how will these factors affect employment rates? According to one report, employment is one of the things these rate increases are specifically designed to control. Analysts predict economic growth in the 2% range until 2020, with continually decreasing unemployment.

And therein lies the rub. The Fed has a “dual mandate” to foster strong employment while also keeping prices in check. These two things have always been symbiotic, because when costs are lower for businesses, they have more cash available to expand operations and hire workers.

But while employment rates are an important barometer, so is wage growth. With unemployment below 4%, it would seem as though the tight labor market would bring higher wages from businesses competing for employees. The problem is, rising consumer prices are eating away at some of the money that would otherwise be going to payroll increases.

And many observers fear that higher rates will strain businesses to the point of less job creation. In this scenario, it’s likely that wage increases would also become more rare.

This paradox is leading some analysts to call for slower rate increases. Their argument is that until the economic growth is reflected in paychecks, the Fed should move more cautiously.

One thing that’s certain is the Fed faces a delicate task. If they increase rates too much, the economy could stagger. But if rates stay down in recession-like lows, inflation could drive prices up and cause even more serious problems for the economy.

The likely outcome is continued rate increases, but at a slightly more conservative pace than previously forecasted. For example, while there are still three increases projected for 2019, that number has been decreased from two to one in 2020.

By keeping a firm hand on the tiller, the Fed can honor its dual mandate and keep the economy growing. In the process, businesses will hopefully find that prices balance out enough to foster a positive environment for hiring and retaining employees.

To learn more about the Federal Reserve rate increases, read how it will affect credit, stocks, and spending in the near future.