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Jobs front of mind as Fed tightens monetary policy

The healthy finances of U.S. banks, companies and households, trumpeted during the pandemic by Federal Reserve officials as a source of resilience, may be an obstacle to battling inflation as central bankers raise interest rates in an economy able so far to pay the price.

In outlining their aggressive turn to tighter monetary policy, Fed officials say they hope to clamp down on the economy without destroying jobs, with higher interest rates slowing things enough that companies scale back the current high number of job vacancies while avoiding layoffs or a hit to household income.

But that means the pain of inflation control would have to fall mostly on owners of capital via a slowed housing market, higher corporate bond rates, lower equity values, and a rising dollar to make imports cheaper and induce domestic producers to hold down prices.

Economists including current and former Fed officials note that unlike prior Fed rate hike cycles, there’s no obvious weakness to exploit or asset bubble to burst to quickly make a dent in inflation – nothing akin to the highly overvalued housing markets of 2007 or the hypervalued internet stocks of the late 1990s to provide the Fed more bang for its expected rate hikes.

The adjustment to tighter Fed policy has been swift by some measures. But it has been spread moderately across a range of markets, none catastrophically, with little impact yet on inflation or consumer spending.