Why Does The Fed Want To Kill Job Openings?

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Why Does The Fed Want To Kill Job Openings?

In short, officials at the Federal Reserve fear too many job openings with not enough workers to fill them could lead to a “wage-price spiral,” a feedback loop that stokes out-of-control inflation. 

From a worker’s perspective, a labor market where businesses are hiring and there are a lot of job openings seems like a great “problem” for the economy to have. If you’ve looked for a job lately, you may have been pleased to see there is a near-record number of positions available (at least as of September). Wages have been rising too (although not as much as inflation) and if your paycheck got a boost, you were probably pretty happy about that too. 

But policymakers at the Federal Reserve are using the powerful tools at their disposal to try to drag down job openings and pay increases.

“The broader picture is of an overheated labor market where demand substantially exceeds supply,” Fed chair Jerome Powell said at a press conference Wednesday. “We would love to see vacancies coming down.”

Why on earth would they want that?

It has to do with the Fed’s campaign to curtail inflation down to its 2% target—from its current 6.2% level—by raising its benchmark interest rate. The goal is to discourage borrowing and spending so that business slows down, there’s less demand for goods and services, and price increases decelerate. 

Fed officials fear that if the labor market stays too good for workers, it could derail their anti-inflation efforts. Wages could start rising significantly, and businesses could raise prices on their own products and services to cover their increased labor expenses. That could in turn make workers negotiate higher wages. That situation—what economists call a wage-price spiral—would make it extremely difficult to tame inflation. The Fed wants to hit the brakes on wage increases without stopping them completely. 

“We want wages to go up, we just want them to go up at a level that's sustainable and consistent with 2% inflation,” Powell said.

That means slowing the economy enough to reduce job openings, but not enough to cause mass layoffs—a tough balancing act that even Powell is unsure can be pulled off. Indeed, many economists expect the economy to enter a “mild” recession next year with a relatively small increase in the unemployment rate as a casualty of the Fed’s war on inflation.

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