Crypto News: How the Fed can help the most vulnerable avoid unemployment

The Fed faces a dilemma with house-price inflation potentially poised for a comeback just as its only tool to fight it threatens to increase unemployment. The poor are the hardest hit by inflation. But they're also the first thrown out of work when growth stalls. Sometimes the medicine is as bad as the disease. Powell knows he's walking a fine line — and that's why this week's rate hike will likely be its last for a while.

It's great to see wage increases, particularly for people at the lower end of the income spectrum. But we want that as part of the process of getting inflation back down to 2 percent, which benefits everyone. I mean, inflation hurts those same people more than anyone else. People on a fixed income are hurt the worst, and the fastest, by high inflation.
-Federal Reserve Chair Jerome Powell, Post-FOMC Press Conference, 14 June 2023

The Fed Chair has told us many times why fighting inflation is so important — because it hurts everyone, particularly those with lower incomes and people living on a fixed income. Jay Powell gets it.

Or does he? That's what this week's The Everything Risk is about: is the Fed's fight against inflation helping the poor or hurting them even more?

Take this one, for example. Have you ever walked through a nice neighborhood and gone by a house that looked like it used to be as nice as the others, but now the shutters are falling off and the paint is chipping everywhere. That's inflation! Not literally, of course. But if you're a pensioner living on a fixed income, it might as well be. When the price of everything goes up a lot, fixed incomes get squeezed and you have to make some untenable choices. Sometimes that includes letting your house fall into disrepair.

But there are other bad inflation situations, too. For instances, my colleague Jonnelle Marte started off a recent piece about inflation in Miami this way:

Makayla Adams is living in the middle of an economic boom in South Florida. To her, it doesn't always feel that way.
The guard at Port Everglades in Broward County was able to log close to 70 hours a week during the busy 2022 winter season for cruises, boosting her weekly pay to about $900 from roughly $500. And even though the county raised her hourly wage to $17 from $15 in January, her expenses — rent, child care, a car payment and car insurance — leave her with little disposable income.

It's worth reading the whole thing here. It shows exactly what Jay Powell was talking about last month. As they debate today and tomorrow whether to raise rates again, one question you should be asking yourself is whether those hikes are going to help the economically vulnerable or not.

- Unemployment rate for Black Americans in June

Here are the two charts from the Miami piece that got me thinking.

This first one encapsulates the situation Marte describes in the quote above. Sure, your salary is going up. But look at the rent prices. You're effectively poorer, even after a raise. And even though rent increases have moderated in recent months, you still have that massive gap to overcome. What's more, after a brief pause, purchase prices are perking up again. And that's sure to feed into rents as well.

What Powell would tell you is that the Fed's got this. Maybe he'll even say as much tomorrow at the press conference. He'll say the Fed is succeeding in its goals, fostering a soft landing akin to the one we saw after it began raising rates early in the business cycle in 1994. Back then, that killed returns for a lot of bond investors — just as it has this go round. But eventually the economy recovered and went from strength to strength, with inflation actually declining in the process beginning in 1996. That's what he could say we're poised for now that inflation is already declining.

But the second Miami chart undermines his case.

The red arrow points to a steep rise in unemployment that can only be attributed to the rate hikes. The Fed's tool is, after all, a blunt one. Behind the euphemisms, cooling the economy means slowing investment, stifling the job market, and taking money out of people's pockets. Effectively, the Fed's medicine kills some of the patients — at least when it comes to Black Americans. In fact, nationwide Black workers have accounted for close to 90% of the recent rise in unemployment. And the cooling labor market has meant a rise in unemployment for Hispanic workers and those without a high school degree too. It has also meant fewer temp jobs for those trying to get a toe back into the workforce. So some will see their paychecks go further as inflation comes down. Others will see their paychecks disappear altogether.

I think the Fed gets this, to be honest. They know they're walking a fine line between recession, unemployment and lower inflation. And I suspect one of the reasons the Fed paused in June was that some members feel like the cracks in the American economic edifice are growing too big to keep hiking every meeting.

I fully expect the Fed to raise rates tomorrow, as does the rest of the market. Fed fund futures show near certainty that another quarter-point hike will be announced. And when the Fed Chair talks about the economy, he will continue to stress the fact that the high level of inflation warrants more rate hikes. But underneath that may be an acknowledgement that the Fed will slow the pace and may even stop altogether. That's certainly what the market thinks. If they do hike again, it probably won't be in September. And if they do, it will only be because the inflation data are really bad — something I see as unlikely given that the math associated with comparing this year to the high levels last year virtually guarantees a slowing of inflation.

So, this is it. We're probably at the end of the line for rate hikes. And let's be thankful for that. If the Fed wants to help protect lower income people from inflation, it needs to make sure they still have jobs. And that means it may need to stop before those cracks in the edifice widen even more.

People generally at the lower end of the income spectrum much harder than people at the middle or the high end because high inflation can get you in trouble right away if you're living on a fixed income just to cover the basic necessities

Jerome Powell

Federal Reserve Chair

Testimony before the House Committee on Financial Services, 21 June 2023, Washington, DC

The Fed is more divided now about rate hikes than at any time during this hiking cycle.
Fewer than 50% of economists now think the US will have a recession in the next 12 months.
The bear market has been erased in lightning speed, less than 20 months.
In Canada, some people think house prices only go up. That makes inflation-fighting harder for the central bank.

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