What Does the Recent Rate Hike Mean for This Hot Job Market?

It means it will get harder to find a job. How hard? Read on my friend…

On March 17, 2022, the Federal Open Market Committee (FOMC) raised interest rates 25 basis points in the hopes of curbing the rampant inflation that is eating into or wiping out our wage gains. This is an example of the Fed creating monetary policy in service of its dual mandate to promote stable prices and maximum employment.

Unfortunately for us, the two sides of its mandate generally oppose each another. Interest rates are raised to promote price stability, but that happens by slowing the economy, which in turn reduces hiring and increases unemployment.

Since the two goals of controlling inflation and low unemployment are at odds, what does this latest move mean for the job market and your search?

With most information, it all depends on your perspective and outlook. However, a continuation of the “anyone can raise money and hire people” is suspect. My two cents are the job market is tightening and thinking more strategically is prudent.

The Good News

In the FOMC’s ideal world, they pull the economic levers just right and raise rates slowly enough that the result is a soft but measurable tap on the brakes. They manage to succeed at the very delicate balance between maintaining low unemployment and bringing inflation under control.

Fed chair Jerome Powell called the current labor market “overheated” and expressed confidence that the rate hike would leave it intact” (2).

Of course, he needs to say that since he is responsible for world financial stability. What does he really think?

With the latest unemployment rate at 3.8% and employers struggling to recruit and retain talent, there is a good chance that the market will stay strong.

Since in this scenario where the overall economy is doing well, the job market should be positive overall. Even if the market slows down, many companies have over-raised equity and debt which will be used for hiring needs. Also, even if the effect of interest rate increases, the effect could be delayed.

One view is that the good times will continue to last for the foreseeable future.

Speculation beyond that is just, speculation.?

The Bad News

Here is a brief refresher on the relationship between a rate hike and slowing inflation: When the prime rate (or Fed Funds rate) increases, loans get more expensive. This also makes consumer borrowing more expensive in the form of higher mortgage, credit card, and car loan rates. It also makes business borrowing more expensive. When capital is more expensive, both businesses and households tighten their belts and become more price-sensitive, which helps counter inflation.

The bad news for the job market is that most businesses rely heavily on borrowed money, and in an environment in which access to capital costs more, there is going to be less spending on other things like expansion – and hiring. If the economy cools too much, businesses could even shrink, leading to layoffs and an eventual recession. While we certainly hope that doesn’t happen, last week’s rate hike was the first of a projected 7 for 2022 in addition to 3 more in 2023.

Another view is some businesses will react by getting bearish and bracing themselves for an economic downturn by making sure to keep their costs (i.e., headcount) in check.

As Claudia Sahm, a former Fed economist said, “Once interest rates go up, some businesses are going to start saying, ‘Is it worth it? Maybe it doesn’t make sense to borrow anymore. That filters down to the labor market because when businesses don’t invest in new stores or factories, they don’t need as many workers” (1).

Another factor that may affect the heat of today’s job market is the pandemic. Now that we’re moving towards normalcy, some of the people who dropped out of the workforce are going to start coming back.

Parents who felt uncomfortable with or were unable to find childcare may join the ranks of those looking for their next opportunity. While greater workforce participation is certainly a welcome change, it might present more competition for job seekers than what exists currently.

So says the pessimist.

Additional Considerations

Not all businesses are created equal. While every business within a particular sector is different overall, some areas of the economy are more reliant on financing than others. And it’s reasonable to expect that a business that relies more heavily on financing is going to be more susceptible in an environment with rising rates.

In general, earlier-stage companies rely more heavily on outside financing.

Many early-stage companies can no longer raise equity easily, they are turning to venture debt which is plentiful yet costly.

Wait a second. So, let me get this straight:

• Early-stage companies can’t fund themselves easily with equity
• Early-stage companies turn to venture debt
• Early-stage companies are turning to venture debt precisely when rates are increasing

I’m no macroeconomist, but that just sounds bad.

It often takes years for a business to break even. That means that until it does, all its expenses are covered by loans or investments. If those loans and investments suddenly become more expensive (new capital or existing floating rate debt of any kind), that could change the picture quite dramatically.

On the other hand, later-stage companies are usually generating enough cash flow to cover their operations. They may still need financing to grow, but in many cases, their core is relatively strong. How well later-stage companies respond to this new normal is yet to be seen. We can say for sure, however, most later-stage CEOs have never been through a rate rise.

Not all early-stage companies are at risk, and not all later-stage companies are immune.?Do your homework for the right employer for you and your family.

Don’t Get Caught with Your Pants Down

We don’t know what is going to happen with the economy in the next few years. Those in power have a vested interest in convincing you it’s all going to be fine. It might be, but there are things you can do to protect yourself in case it’s not. As a finance career coach who lost his Wall Street job in ’07-’08, I learned a lesson or two.

Mostly what I learned was things change.

As noted above, think and research. If you are currently employed, find out where you stand. How reliant is your company – and therefore your job security – on credit? Think through the implications of a market downturn on both your employment and your personal choices. If you work for an early-stage startup and your household relies on your income, maybe this isn’t the moment to buy that new Lamborghini.?A better idea is to buy one for this finance career coach.

Summary

No way. I don’t do summaries since it’s a cheat. Go back and read this 5-minute article. I spend a lot of time on it. If you don’t, I will be insulted and mark you down for no holiday card nor a free resume review! No holiday card for you! (Seinfeld episode please?)

Sources

Bhattarai, Abha “Four Ways the Fed’s Interest Rate Hike Could Affect You” Washington Post 3/16/2022. Accessed 3/17/2022 https://www.washingtonpost.com/business/2022/03/16/fed-interest-rates-impact-economy/

Lane, Sylvan “Powell: ‘Overheated’ job market can withstand rate hikes”?The Hill March 3, 2022, Accessed march 17 2022 https://thehill.com/policy/finance/596802-powell-overheated-job-market-can-withstand-rate-hikes