Why the US job market has defied rising interest rates and expectations of high unemployment

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Last year's spike in inflation, to the highest level in four decades, was painful enough for American households. Yet the cure — much higher interest rates, to cool spending and hiring — was expected to bring even more pain.

, has scarcely budged since March 2022, when the Fed began imposing a series of 11 rate hikes at the fastest pace in decades.

The idea that defeating high inflation would require sharply higher unemployment is based on a long-time economic model that Claudia Sahm, a former Fed economist, suggested that those who assumed that surging unemployment was a necessary price to pay for conquering inflation believed that the price spikes of the past 2 1/2 years were driven mostly by overheated demand.

This inflationary episode, Detmeister said, may end up more closely resembling the one that occurred after World War II than the one of the late 1970s and early 1980s. After World War II, manufacturing output slowed as factories retooled from wartime production. At the same time, many returning servicemembers moved to the suburbs, and demand spiked for homes, appliances and furniture. Even so, inflation eased once output resumed.

“The disinflation we’re seeing,” he wrote in his study, “is therefore broad and could continue.”THE JOB MARKET HAS CHANGED Powell noted last week that fewer job openings and more workers mean the labor market has been brought into better balance. This has taken the pressure off companies to raise wages to find and keep workers. Still, with inflation having eased, hourly pay is now growing faster than prices.

Americans as a whole saved a sizable chunk of the thousands of dollars of stimulus checks and enhanced unemployment benefits they received during the pandemic. Those savings helped propel consumer spending well into this year.

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