Layoffs ahead? The Fed’s efforts to beat inflation, October 2022

For the Federal Reserve, slowing inflation may mean slashing job growth. Will we trade high inflation for high unemployment? Berkshire Money Management CEO and Founder Allen Harris explores how employment is impacted by interest rates, and why the Federal Reserve might want you to lose your job.

 

 

TRANSCRIPT:

The Federal Reserve is an independent government body. So they’re not supposed to listen to the White House or Congress or House of Representatives. They’re supposed to do whatever they need to, to fulfill their two goals, or mandates.

One is stable growth (employment) and the other is to keep inflation stable. Hard to do sometimes. You have to sometimes weaponize one to take care of the other mandate. And in a very real way, what they’re doing right now is weaponizing the labor force and trying to reduce employment. Trying to get people to lose jobs.

They wouldn’t phrase it that way, but they did phrase it not too differently from that, and I forget the exact language that they used, but they said part of what we need to do in order to slow demand, which would then reduce inflation, is that people would – as a consequence, people have to lose jobs.

The Fed is trying to reduce the prices of things. They’re trying to reduce inflation. And we can talk about what that looks like and how that was popped up and how it’s measured and where it’s going.

[00:01:00]

But yeah, in order to reduce inflation, they’re trying to increase the borrowing costs.

There are costs that they’re trying to increase – the mortgage-backed securities that they stopped selling made housing much more expensive to us. But in a real way, what it does then is push down the cost of shelter, because you don’t have the demand for it. You’re raising some prices to push other prices down.

The end goal for the Fed is to push down inflation, and they have to hurt the economy to do so, which when they hurt the economy means people lose jobs. And we’ll end up seeing that in the 2023.

We’ve had massive growth of jobs, like 500,000 per month, which is huge. (Jobless numbers actually come out tomorrow. I don’t know what they’ll be. Some indicators suggest a couple hundred thousand, which is still actually very robust)

But, you need about 130,000 per month in order to have enough job growth for people who are entering the workforce. So it’s still a positive development. So in order to fight inflation, you actually want to probably be below 130,000.

[00:02:00]

So whether you want to call it low or not, I mean, it’s a relative thing for sure, but in terms of what you need to fight inflation, the Fed would, they might not say this exactly, but they want to see it below 130,000. [We’re] probably going to see some negative prints. And you’re probably going to end up seeing that. I mean, in the last few months, you began to see startups – so a lot, especially, you know, not just startups, but like mom pop shops kind of popping up, kind of thing.

Over the course of 2022, something like 750 firms have laid off 83,000 jobs. So those types of firms in particular. And there was a recent survey done. I forgot who did it … Price, Coopers Waterhouse, excuse me. Their survey wasn’t for the mom and pops or the startups, but for larger companies, Nikes and General Mills and all those, you know, brand names we’re familiar with. And 50% of CEOs, or those who responded to the survey, said that they anticipate to lay off employees in 2023. The next 12 months, I think was the way it was questioned.

[00:03:00]

It does follow a bit of a script. And there tends to be leading indicators that get to it, and the trough is typically when you see companies, because the last thing companies want to do is lay off employees, especially when they find it hard to find employment, [cut jobs].

But in general it’s companies can’t control inflation very well. But they can control the cost of employment, so they’re going to lay off people, they’re going to freeze hiring.

The last, I don’t know, 4, 5, 6, 7, 8, 9 months, whatever it happens to be, there’s a real strong labor market and certain things rose in common vernacular and “TikTok nation”, like, you know, “quiet quitting” and stuff like that where, “I don’t like this job, so I’m just not gonna do it.” That’s the sort of thing that is going to get people fired.

But because before the management might have said, “well, you know what, we’ll deal with it for now. And, I can’t find anyone else, and I’ll defer to this person in that. Maybe it’s a new generation that thinks differently, so I’ll try to manage around that.”

[00:04:00]

But then you get to a point like, “well, you know what? Inflation’s super high and I can’t afford these things that I need. We need to cut cost. Demand is down. Well, okay. I guess we’re not going to put up with that quite as much.”

But, those attitudes, I suppose, aside, the strength of the labor market is going to dissipate.

 

Allen Harris is the owner of Berkshire Money Management in Dalton, MA, managing more than $700 million of investments. Unless specifically identified as original research or data gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable. Full disclosures. Direct inquiries to Allen at [email protected].