Job losses might block Fed's 'no-recession' hopes, warns Vanguard's top economist
'Semantically, they're on record saying no recession,' Davis told Bloomberg. 'But by that metric, it actually is a recession — because you have very modest job losses,' he clarified, referencing the projected unemployment rate.
The imminent threat of American job losses could play a spoiler to the Federal Reserve's aspirations of a no-recession scenario, warns Joe Davis, the leading economist at Vanguard.
The repercussion of the central bank's steep interest-rate hikes is anticipated to push unemployment beyond the 4% threshold in the upcoming 12 months, a consensus shared by most financial institutions as the impact on the labor market becomes apparent, Insider reported.
In his conversation with Bloomberg's "What Goes Up" podcast, Davis pointed out that while this downturn in employment would likely dampen wage growth and aid inflation in its descent towards the Fed's goal of 2%, it could also jeopardize the central bank's vision of a "soft landing." This scenario envisages a cooling of soaring prices, sans a U.S. 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%," remarked Davis, who also serves as Vanguard's chief global economist and head of investment strategy.
Davis added:
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.
Davis' comments follow the Fed's own declaration that a recession in the U.S. this year is unlikely.
"Semantically, they're on record saying no recession," Davis told Bloomberg. "But by that metric, it actually is a recession — because you have very modest job losses," he clarified, referencing the projected unemployment rate.
Since March 2022, the central bank has elevated interest rates from almost zero to over 5% in a move to control skyrocketing prices, while also promising to factor in data while tightening its stance last week.
Although inflation has cooled down from the four-decade high to a more manageable 3%, and job figures and U.S. GDP have been consistently performing despite the swift rise in borrowing costs, Davis' cautionary note suggests that the road ahead might not be as smooth as the Fed hopes.
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