How will the Fed’s rate hikes impact the job market?

Financial markets have continued to tumble, fueled most recently by the Federal Reserve’s steepest rate hike in nearly 30 years. Inflation has surged to a 40-year high of 8.6%, spurring weakening consumer confidence. And many economists see greater likelihood of a U.S. recession over the next year.

Yet at the same time, recent data suggests the job market remains strong. There were almost twice as many job openings as unemployed workers in April, and wages have risen over 5% over the past year. "The labor market has remained extremely tight," Fed Chair Jerome Powell said last week, adding that "labor demand is very strong."

Indeed, the Fed believes it can achieve a so-called “soft-landing” — i.e. taming inflation without significantly harming economic growth and employment. The central bank expects the unemployment rate to rise to only 4.1% by 2024 from 3.6% now. That’s not a distressingly high jobless rate — it’s been above that level 80% of the time since 1947.

So, how do we reconcile these two seemingly contradictory trends? Can the job market remain relatively robust amid higher rates and slowing growth, or is it destined to slump once the Fed’s aggressive moves have more time to take effect?

The answer may depend on how severe the economic slowdown turns out to be, and there’s little consensus about that. In two opposing New York Times op-eds, Steven Rattner, a counselor to the Treasury secretary in the Obama Administration, appeared to argue that a recession is practically inevitable, while former Fed Chair Ben Bernanke said rate hikes “can help the economy and the job market avoid much more serious instability in the future.”

Bankers aren’t clear either. Deutsche Bank said Friday it expects “an earlier and somewhat more severe recession,” while Nomura economists see a recession by the end of this year as more likely than not. Yet at the same time, Morgan Stanley CEO James Gorman said, “I don’t think we’re falling into some massive hole over the next few years,” adding, “I think eventually the Fed will get a hold of inflation.”