The US Federal Reserve sent two contrasting messages last week: They wouldn’t be hiking interest rates again just yet, marking a measure of progress in the battle against inflation. But the war isn’t won, so the Fed kept rates high and signaled that economic policy may remain restrictive into 2026.
So, what’s the new normal? We asked Daniel Altman, chief economist for flexible labor platform Instawork, about the implications for labor markets, housing, and more.
This interview has been lightly edited for length and clarity.
We are hearing that inflation is still a threat, but that the Fed is also not raising interest rates in the short term. Why is that?
There are two things to understand here. One is that when the Fed keeps interest rates high for a long period of time, that has a cumulative effect on the economy. So even if they’re not continuing to raise interest rates, by keeping rates at a high level they are continuing to keep credit markets tighter, and putting a drag on economic growth.
The second thing to understand is that tightening hasn’t stopped. Even though the Fed isn’t raising interest rates right now, they are still shrinking their balance sheet, which means they’re reducing the positions that they hold in securities markets. That takes liquidity out of the markets as well.
You have said that the major core driver of inflation, excluding energy and food, is housing. But as you’ve pointed out, high interest rates may slow housing construction and exacerbate high prices. What approach could the Fed take to this problem?
I think the Fed is in a quandary, because the only instruments it has are pretty blunt instruments that have effects that percolate throughout the whole economy. So if the Fed sees house price inflation or housing services inflation as very sticky, and something that they can’t do very much about, they may think that they just have to hammer the rest of the economy so that all the other prices come down.
So in some ways, they want to get that inflation rate down to where consumers can see that it’s much lower. And they don’t necessarily care what the composition of the prices is, as long as they get close to that target and reset those expectations. Unfortunately, I feel like they may be in a situation where they’re so tied to that target, that they decide to bludgeon the whole economy.
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Let’s turn to the labor market, which I know is a particular interest for you. What effect do you see these continued high interest rates meaning for the labor market?
Job openings were enormous when the Fed was in the thick of its tightening cycle, and we had maybe two openings for every unemployed person. And so, there was a lot of room for openings to come down before business had to start cutting into the bone, their actual payrolls.
The imaginary, notional part [of the labor market] was coming down and the real part was still intact. So, you know, we were lucky in a sense that we could see such big increases in interest rates without a big increase in unemployment. The question is whether that will continue. Because if you look at job openings, now they’re coming down very steeply, coming down sort of linearly. That’s not the way we usually like to land a plane.
Do you see that balance of power between employers and employees starting to shift back toward employers?
There’s no doubt that workers now have slightly less bargaining power because more people have returned to the labor force and demand is just slightly lower. What we do at Instawork is give workers many more options in the labor market. And that helps them to build bargaining power as well, because they have more alternatives to choose from. There’s not just one employer—now they have other options. So even when workers are not necessarily organized in unions, they can still increase their bargaining power by having more options in the labor market.
What do you hope to see happen next in terms of policy?
There were a lot of forces driving inflation that were related to supply in different markets—the supply chain, energy supply, housing supply. And there are things we can do to improve supply, but those are not tools that the Fed has access to. They’re things that Congress has access to and individual statehouses have access to, we could have done a lot more. We instead used a lot of blunt instruments, both on the monetary and the fiscal side. So it’d be great to see policy become a little more nuanced when it comes to dealing with those kinds of problems.