Key takeaways: Deflation in the US could cost workers dearly

WASHINGTON, Feb 1 (Reuters) – The Federal Reserve is relentless in its efforts to reduce inflation to 2% from its last estimate of 5%. It comes at a human cost. From here and there, nearly 1 million more Americans could be out of a job, according to the Fed’s own estimates. Given the uncertainties in the psychology of inflation, it’s not clear that the Fed thinks so alone.

Chairman Jay Powell has stuck to his mission, even as higher borrowing costs have strained families’ finances. Spending in December fell by the most since February 2021, the US Bureau of Economic Analysis said on Friday. Still, markets expect the central bank to raise interest rates on Wednesday and again in March, according to a Reuters poll.

As predicted by the officials themselves, the fight against inflation will affect hundreds of thousands of workers. Projections released after the Federal Reserve’s December meeting show that by the time inflation reaches 2 percent in 2025, unemployment will rise to 4 percent from 3.5 percent in December. This equates to 800,000 people becoming unemployed.

However, if people who left the workforce and didn’t hunt for work during the pandemic return to the workforce, that number will increase. Suppose the participation rate — or the share of Americans who are working or actively trying — returns to where it was at the end of 2019, and 4 percent unemployment means a total increase of 978,000 unemployed.

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Inflation also brings pain, especially for less well-off households, but the trade-off is not simple. If the Fed stops hiking now, inflation may ease without companies having to cut wages. In any case, the number 2% is more of a symbol than science. Inflation often rose above 2% in the 1990s. And according to the New York Federal Reserve, Americans tend to overestimate how high inflation will be next year, typically expecting it to be around 3%.

Powell has so far ruled out lowering the 2% target. A rate hike on Wednesday suggests he is serious, and markets may like to see central banks play by their own rules. Workers who are losing out on the Fed’s lack of precision probably have different ideas.

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News text

According to a Reuters poll, the US Federal Reserve was expected to raise interest rates by 25 basis points on February 1, walking away from a 50 basis point increase approved in December.

Forecasts released by the central bank at its December meeting showed inflation returning to 2 percent in 2025. It was observed that the unemployment rate will reach 4% after 2025, which is higher than the current level of 3.5%.

Prices across the United States rose 5 percent in December from a year earlier, the Bureau of Economic Analysis reported Jan. 27.

Edited by John Foley and Amanda Gomez

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The opinions expressed are those of the author. They do not reflect the views of Reuters, which is committed to integrity, independence and freedom from bias under the principles of trust.

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