Rate hikes are intended to cool the labor market & inflation by increasing unemployment, according to the Fed. But as usual, the law of unintended consequences kicks-in and it turns out that the economic challenges from higher rates can drive an offsetting labor participation rate increase.
Commentary
Higher interest rates are hard on the pocketbook & can serve as a powerful impetus for those without jobs (including retired people) to return to work. Looking back to 1985, the labor participation rate was substantially higher during periods of high Fed Fund rates as evident in the chart below. So, while rate hikes can drive higher unemployment (the Fed’s desired results), they can also drive an offsetting labor participation rate increase.
What if the Fed’s mandate was not to stabilize prices, but to maximize employment? Perhaps this would provide the best chance to increase supply sufficiently to stabilize inflated prices as entrepreneurially minded people are encouraged to hire new employees to help build new ventures to address the most profit-rich business opportunities with innovative, cost-effective products & services.
