Unemployment Could Hit 5% Next Year, Says New York Fed President

The Fed has seen a series of its officials giving speeches in which each provides their view of inflation and what needs to be done.

While Chair Jerome Powell is scheduled to speak today at 1:30 at the Brookings Institution and drop more hints, yesterday saw John Williams, CEO and president of the Federal Reserve Bank of New York, have his turn. In a videoconference with the Economic Club of New York, Williams touched on some high-level theory—a description of inflation causes as layers in an onion—but then moved into some predictions that were harder in multiple sense of the word, both as more specific and more potentially more painful.

One was an estimate that real GDP after inflation will grow only modestly in 2022 and 2023.

Next, a look at labor markets, because they are a major sign for the Fed. “The labor market remains remarkably tight: Hiring is robust, and we still are seeing rapid wage gains,” Williams said. “But with growth slowing, I anticipate that the unemployment rate will climb from its current level of 3.7 percent to between 4-1/2 and 5 percent by the end of next year.” It’s important to remember that not many years ago even 5% unemployment would have seemed low by historical standards.

Third, Williams pointed to “cooling global demand and steady supply improvements” that would help slow inflation “from its current rate to between 5 and 5-1/2 percent at the end of this year, and to slow further to between 3 and 3-1/2 percent for next year.”

The guess about GDP growth in the US is something that others like the OECD have estimated. It also makes sense. If there were high growth at this point, inflation would be increasing rather than the opposite.

Inflation slowing to between 3% and 3.5% would still be short of the Fed’s target 2%, meaning that interest rates would remain elevated through 2023. Don’t plan on a bridge loan necessarily carrying a project through to a land of milk, honey, and easily affordable financing.

And then there’s the labor market, both Fed bête noire and go-to explanation of why inflation is happening, with “widespread labor shortages [that] have led to higher labor costs.”

The Fed has wanted to drive up unemployment under the assumption that it would help cool the economy. What that means for commercial real estate is likely mixed. As that would be a signal to the Fed that the economy was cooling, it would probably be coupled with slowing interest rate increases, which means better improved financing for CRE.

However, there would also be some negative effects. More people out of work means greater percentages of the populace facing difficulty in paying bills, like rent, and companies might have even less need for the amount of office space companies own or lease.