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Efforts to control inflation prompted the Federal Reserve to take drastic measures, but the Bank of America warns that this could result in mass unemployment.
Bank of America took note of the Fed’s aggressive rate hikes and said the U.S. economy could potentially lose tens of thousands of jobs each month in 2023.
With September showing a strong job market, the Fed is doing all it can to turn things around by raising interest rates.
Aggressive rate hikes will therefore lead to lower demand for cars, homes, and appliances.
The Fed’s fight against inflation is building up pressure, which means that non-farm payrolls will begin to decline in early 2023.
As a result, more than 175,000 jobs were lost each month in the first quarter of the year, according to Bank of America.
The bank’s charts suggest that job losses will be recurring for most of 2023.
“The premise is a harder landing than a softer one,” said Michael Gapen, the head of US economics at Bank of America.
Ideally, the Fed would have slowed the labor market enough to bring inflation back to healthy levels without creating significant and permanent job losses.
However, Bank of America does not believe the Fed will make such a decision.
“We are looking for a recession to begin in the first half of next year,” Gapen said.
Despite the market slowdown, Friday’s jobs report showed that the United States added more than 263,000 jobs in September.
It brought the unemployment rate down to 3.5%, the lowest level last seen in 1969.
However, Gapen expects unemployment to rise between 5% and 5.5% next year.
Meanwhile, the Fed forecasts an unemployment rate of 4.4% in 2023.
The US Federal Reserve is raising interest rates at its fastest pace in four decades to curb inflation.
Fed officials said they are in no rush to get out of anti-inflation mode to help the economy avoid a slowdown or recession.
“They’ll accept some weakness in labor markets in order to bring inflation down,” said Gapen.
Fed officials say interest rates are expected to remain at tight levels for some time to come.
Gapen said that while recessions have rapid snapbacks, the Fed’s stance of holding rates high for a long time suggests that the situation is continuing.
“We could see six months of weakness in the labor market,” he said.
Meanwhile, some forecasters are bullish about the state of the job market.
On Monday, the Conference Board announced that the September Employment Trend Index had been ticked.
The index is a combination of leading labor market indicators.
They said this meant employment growth in the coming months, but employment growth is likely to slow from its recent pace.
On the plus side, however, those calling for a recession will not see unemployment rise like in 2008 or 2020.
Bank of America expects the unemployment rate to peak at 5.5% in 2023, after reaching a peak of nearly 15% in 2020.
“Although nobody wants to be callous about someone losing their job, this could be classified as a mild recession,” said Gapen.
US economy will soon start losing 175,000 jobs a month, Bank of America warns