Fed likely to push interest rates to 5%, Obama economist says

CHICAGO – The Federal Reserve is likely to keep pumping up interest rates until they hit 5%, said Christina Romer during this morning's LIMRA economic update.

And they might stay there for a while, she added, during one of the closing sessions of the LIMRA 2022 Annual Conference.

Romer served as chair of the Council of Economic Advisers under President Barack Obama. She was joined on stage by Austan Goolsbee, who succeeded Romer as chair of the council in 2010.

Both are now professors of economics – Romer at the University of California at Berkeley and Goolsbee at the University of Chicago Booth School of Business.

The Fed raised interest rates by 0.75 at its September meeting for the third time this year, officially bringing the benchmark interest rate that influences almost all borrowing costs throughout the economy up to a target range of 3-3.25 percent, the highest since 2008.

The pace of rate hikes might slow down in 2023, Romer said, but will continue.

"There was this hope that rates would start to go down," she said. "I don't think that's going to happen. I think it could get up close to five [percent] and hang there for a while."

Employment issues

The economists had plenty of thoughts on the state of employment. Squashing inflation is the Fed's No. 1 goal and reason for raising rates, but some analysts say it will crush the jobs market in the process.

Others claim the U.S. can't be in a recession because employers are still hiring robustly. But the pace of job growth is expected to be roughly cut in half during the fourth quarter, Bank of America said in a Friday report.

Then there's wage growth, which hasn't risen as quickly as some analysts forecasted in a tight labor market. Wages might be stagnant for many due to work-from-home perks offered in lieu of salary bumps, Romer suggested.

"There has never been any time as history where the unemployment rate has been below 4% and real wages weren't growing," Goolsbee noted.

One reason is the strong "worker power" in play right now, he explained. Workers have leverage unlike any period in history. He cited an unnamed CEO claiming, "The only question I can ask employees now is do they want their popcorn buttered or salted?"

Long COVID effects

Goolsbee proposed a couple of additional reasons why employment numbers seem inconsistent with other economic factors. For starters, legal immigration has slowed significantly.

"Literally almost 50% of the growth of the labor force pre-COVID was coming from immigrants," he said. "Neither party politically is wanting to increase that channel, so I don't see that getting better."

Secondly, there are 500,000 to 1.5 million workers either out with long COVID-19, or taking care of someone who had been sick, Goolsbee said.

"So any employer who feels like nobody wants to work, it's not that they don't want to work," he added. "They don't want to come work for you in your office."

 

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

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