money arrow
Jerome Powell headshot
Federal Reserve Chairman Jerome Powell

At 8.5%, the U.S. inflation reached its highest point in 40 years earlier this month while the unemployment rate has dipped to 3.6%. A proposed half-point rate hike from the Fed next month could slow inflation, according to Federal Reserve Chair Jerome Powell.

“There are substantially more job openings than there are people that are unemployed. …There is more than 5 million more in supply than there is demand [in labor],” Powell said Thursday at an International Monetary Fund debate on the global economy. 

“The labor market is hot. It’s unsustainably hot,” he added. 

The workforce shortage, Powell said, means that employers must pay higher wages to recruit and retain workers. The employers’ costs are then passed to customers in the form of higher prices, which adds to inflation. The thought behind raising interest rates to slow inflation, according to Powell, is that employers would stop posting as many job openings. Raising the rate wouldn’t lead to layoffs but would reduce the number of openings, he said.

“Fewer openings would reduce their need to raise pay and would ease inflationary pressures,” AP News reported in an article about the talk.

According to the media outlet, average hourly wages are increasing at about a 5.5% annual pace, and “economists estimate that if the gains slowed to 3% or 4%, it would reduce inflation by roughly 2 percentage points.”

“It’s a very good labor market for workers. It’s our job to get it to a better place where supply and demand are closer together,” the Fed chair said.

Powell said that the United States has had an expectation that inflation would peak around this year “and would come down through the course of the rest of the year. …It could be that the actual peak was in March, but we’re not going to count on it. We’re also no longer going to count on help from [the] supply side.”

The Fed anticipates introducing the rate hike early next month, he said, “and getting us to expeditiously to levels that are more neutral and that are actually tightening policy if that’s appropriate when we get there.”