Ripple Effect– a spreading, pervasive, and usually unintentional effect or influence
In a bid to counter rising inflation, the Fed has steadily raised rates since March, with the most recent 75 basis point (.75%) hike last Wednesday (November 2, 2022), and more hikes expected. The main goal of the Fed in raising rates is to curb inflation. So far, the unemployment rate remains low and job openings high, but what are the ripple effects?
According to a Chicago Booth study, rate hikes may worsen inequalities in the labor market. This theory may manifest in multiple ways. Hiring generally slows after successive rate hikes, which leads to higher unemployment. Companies may reduce employment levels, through attrition, by leaving vacant positions open, or through layoffs.
The Booth study shows that younger, less experienced people may be the most affected by changes in corporate hiring plans. The latest government numbers for youth employment (Summer 2022) are strong, but also important to watch for trends related to overall employment numbers.
Remember folks, a reduction in job openings often leads to hiring freezes and layoffs. Keep an eye out for construction and manufacturing, capital intensive industries dependent on long-term financing, and sectors likely to pull back on headcount more quickly than others after Fed rate hikes.
The Booth researchers focused on the economic factors of Swedish Central Bank actions in July 2011, and the relevance the results have for other economies. The researchers state, “Sweden has a dynamic labor market with a large domestic manufacturing sector that makes many of the labor market insights relevant for other developed economies.”
One conclusion of the study states, “The large increases in unemployment among low-tenure, less-educated, and younger workers suggest that contractionary monetary policy shocks may exacerbate inequality in the labor market”. Sounds like a ripple effect that needs to be considered as future rate hikes are considered.
Read the research and let me know what you think. Send me an email by clicking here.
~ Brian Kasal- The Leadership Matrix
P.S.- Did you see my last Leadership Matrix post? Do You, Pickleball?