Disinflation in the United States: The scale of the sacrifice on the labour market

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Inflation News

Unitedstates,Technical Analysis,CPI

Since a 1977 act, the dual mandate of the Federal Reserve (Fed) has de jure entrusted it with the objectives of maximum employment and price stability (the latter being expected to favour the former in the long term).

Since a 1977 act, the dual mandate of the Federal Reserve has de jure entrusted it with the objectives of maximum employment and price stability . However, these objectives can come into conflict and, as has been the case since March 2022, the Fed may have to give clear priority to reducing inflation at the risk of damaging employment and output. This refers to the concept of sacrifice ratio or trade-off, i.e.

The rebalancing of the labour market has been made possible by an improvement in the supply component – which was not the Fed's central scenario – which has so far prevented the labour market and the economy from experiencing a hard landing. However, the trend in the unemployment rate is tending towards the trigger point for the Sahm Rule. The Sahm Rule links an increase of +0.5 pp in the three-month moving average of the unemployment rate at its 12-month low to a recession.

 

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