Low unemployment in America shows that the Fed has not mucked up the job market yet, despite the sharp rise in interest rates
in pole-vaulting, a soft landing is preferable to a hard one. Most recently America’s finance wonks have been using the term to refer to a slow easing of demand and price pressures, partly as a result of increases in interest rates. Such is the desire of the Federal Reserve, which since March 2022 has raised its benchmark rate from between zero and 0.25% to between 4.25 and 4.5%. Yet the inflation rate stayed stubbornly high for much of last year.
Recent data from America’s Bureau of Labour Statistics have fuelled optimism among those hoping to avoid a painful landing. They show that inflation is slowing. From November to December 2022, prices for all goods fell by 0.1%. Compared with December 2021, prices increased by 6.5%, the smallest 12-month rise since October 2021. Removing the volatile cost of food and energy from the index, prices increased by 5.7% over the past year. The three-month “core” inflation rate was 3.
Another marker is a stable unemployment rate. On this measure, there was more good news. America’s unemployment rate fell from 3.6% in November to 3.5% in December— when extended out by several decimal points, it was the lowest reading since 1969. This figure is slightly skewed by a decline in the total number of willing workers since the onset of the covid-19 pandemic. Labour-force participation is still lower than it was in January 2020, for instance.
There is time still for the American economy to hit a bump. For one, monetary policy operates with a lag, so the downside pressure from higher interest rates is just starting to make itself felt. The continued resilience of the labour market is a risk itself: the Fed is now most concerned about whether rising wages will feed into stubbornly high underlying inflationary pressure, thereby necessitating yet more rate increases.
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