Some analysts say the Federal Reserve could change its inflation target

But the continued resilience of the jobs market confirms Fed Chief Jerome Powell’s assessment that the U.S. central bank still has “some way to go” in raising rates to bring inflation under control. Financial markets now expect official interest rates to peak between 5% and 5.25% next year.

Of course, Powell is in a good position to speak tough, given that the US labor market remains strong, with the unemployment rate well below the 4.25% level that the Fed considers the neutral unemployment rate.

“The Great Pivot of 1974”

But some economists say Powell will quickly abandon his aggressive attack on inflation if the US job market deteriorates sharply, even if price pressures persist.

Some say that in the face of a rising unemployment rate in the United States, the Fed will be tempted to raise its inflation target to 3%, from the current 2%, to justify its change.

According to Bank of America strategist Michael Hartnett, there is precedent for this in what he calls “the great pivot of 1974.”

Back then, the Fed had tightened its stances in 1973 and 1974 in an attempt to control inflation, which had surged due to soaring oil prices. As a result, the Fed raised its target short-term interest rate from 5.5% to 13%.

But that turned around, as economic activity plunged, the unemployment rate rose and a brutal bear market wiped out 40% of the value of the US stock market.

Hartnett predicts that “job losses will be the catalyst for the pivot of 2023”.

Yet other economists are far from convinced that the US labor market downturn will be as bad as it was 50 years ago.

They say the US labor market is undergoing a major structural change as baby boomers gradually exit the workforce at a time when growth in the working-age population has collapsed.

The average annual growth of the US working-age population is expected to slow sharply to just 0.2% over the next three decades, from 1% average annual growth over the past 40 years.

Meanwhile, American companies are still struggling to find enough workers. The total number of job vacancies rose to 10.7 million in September, well above the 5.8 million unemployed looking for work.

As long as this imbalance persists, the Fed’s room to execute a 1974-style pivot is limited.

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