Stocks tumbled Friday as investors reacted to data revealing a stronger-than-expected labour market, demonstrating the head-scratching but fundamental economic concept that many see lower unemployment and higher wages as a bad omen for the market.
6%. That’s how high unemployment needs to be to tame inflation, Clinton-era Treasury Secretary Larry Summers said Thursday, a more than 70% increase from its current rate.
Inflation is currently over 8%, far past the Fed’s 2% target, and the central bank has hiked the federal funds rate five times since March to its highest level since 2008. The market has tanked as rates have surged, with the Dow down 20% year-to-date, on pace for its worst year since the Great Recession. Numerous major companies have conducted layoffs in recent months, most citing poor macroeconomic conditions, including JPMorgan Chase, Goldman Sachs and Snap.
Andrew Challenger of the career services firm Challenger, Gray & Christmas said Thursday that the labour market is beginning to show “some cracks,” after his firm reported a massive increase in job cuts and hiring intentions.
The Fed is relatively powerless in actually affecting the labor market, instead banking on the trickle-down effect of rate hikes leading to slumping corporate profits due to the higher borrowing costs, which also dampen consumer demand. Some criticize the Fed’s hope for higher unemployment as cruel and misguided, including Sen. Elizabeth Warren (D-Mass.), who wrote in a June Wall Street Journal op-ed: “Make no mistake: If the Fed cuts too much or too abruptly, the resulting recession will leave millions of people—disproportionately lower-wage workers and workers of color—with smaller paychecks or no paycheck at all.”
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