US job losses to disrupt Fed’s no-recession scenario, warns Vanguard top ANBLE.

US job losses to disrupt Fed's no-recession scenario, warns Vanguard top ANBLE.

The Looming Job Losses that Could Ruin the Federal Reserve’s No-Recession Dream

The Federal Reserve’s dream of a no-recession scenario may be shattered soon, as employment losses are expected to mount in the United States. Vanguard’s top analyst, Joe Davis, warns that unemployment rates will likely spike above 4% over the next year, potentially derailing the central bank’s plans.

While the Fed has publicly stated that it no longer expects a recession in the US, Davis argues that the modest job losses that will accompany the spike in unemployment necessitate using a different metric. By that alternative measure, a recession could be considered imminent, even if not necessarily deep in magnitude.

In an interview with Bloomberg’s “What Goes Up” podcast, Davis explains that the aggressive interest-rate hikes implemented by the Federal Reserve will soon trickle down into the labor market, leading to a surge in job losses. While this will result in a slowdown in wage growth and help bring inflation down to the Fed’s desired 2% target, it will also thwart the hopes for a “soft landing” without a recession.

“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%,” says Davis, who serves as the chief global analyst and head of investment strategy at Vanguard. He adds that historically, a rise in the unemployment rate of at least 30 or 40 basis points, pushing it above 4% over the next year, has been associated with a recession.

Davis’s warning echoes the cautionary stance taken by the Federal Reserve. The central bank, which has increased interest rates from near-zero to over 5% since March 2022, has been trying to rein in soaring prices. However, it maintains a data-dependent approach to tightening and has tempered its recession expectations for the year.

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The good news is that inflation has fallen from four-decade highs to just 3%, and job numbers and GDP have continued to rise despite the rapid increase in borrowing costs. The challenge, according to Davis, lies in the fact that it will require a certain level of labor market weakness to achieve the desired 2% inflation target.

While the Federal Reserve is technically on record saying there will be no recession, Davis emphasizes that the unemployment metric tells a different story. He argues that the job losses, though modest, indicate a recession, making the no-recession scenario semantics rather than a reflection of the economic reality.

With unemployment rates expected to rise and job losses on the horizon, the Federal Reserve’s dream of avoiding a recession may soon face a reality check. As the labor market weakens and inflation falls, the central bank will be forced to navigate the rocky road ahead and adjust its policies accordingly. Only time will tell if a soft landing can be achieved, with a recession averted despite the challenges.

• Economy
• recession
• Vanguard