By the end of the first week of the rest of our lives, we’ll have a better idea about whether the Fed is or isn’t making progress towards engineering a more balanced labor market. Traders are anxious to see cooler wage growth and fewer job openings in the US. The first week of 2023 has the potential to deliver both. Or not.

Hopefully, “engineering a more balanced labor market” doesn’t wind up being a euphemism for driving up the unemployment rate, but many economists think that’s exactly what’s required to guard against the dreaded wage-price spiral.

The Fed is understandably loath to concede the point. Already, Jerome Powell is under pressure from key Democrats who worry the most aggressive pace of rate hikes in a generation is all but guaranteed to dead end in recession.

Although the last several sets of economic projections from the FOMC came with higher median unemployment forecasts, “high” is a relative term. Many argue a 5% jobless rate is the minimum required to balance the labor market and thereby bring wage growth down to levels more consistent with 2% inflation.

The Fed leverages two arguments to square the circle. The first revolves around the idea that millions of job openings across the economy can be rendered superfluous if rate hikes succeed in cooling demand. Once businesses are no longer short of labor, competition for workers will decrease, wage pressures will moderate and, ultimately, inflation will recede. In that scenario, very few Americans would actually need to lose a job. The second entails the almost explicit contention that a higher jobless rate is actually the best way for the Fed to meet its maximum sustainable employment mandate. As things currently stand, the labor market is overheating, leading directly to scorching-hot wage growth, which is in turn pushing up on inflation. That inflation is eroding wage gains, thereby creating a vicious, self-defeating cycle. Short-circuiting that cycle is the only way to ensure labor market stability over time. That’s an uncomfortable chain of reasoning given the rather stark juxtaposition with the rationale for adopting flexible average inflation targeting in August of 2020, but… well, let’s just say mistakes might’ve been made.

For their part, Goldman is generally optimistic about the Fed’s chances of pulling off what many still argue will be a very difficult hat trick, even as the bank cautions that the progress made so far isn’t close to sufficient.

“Based on timely job openings measures from LinkUp and Indeed, we estimate that our jobs-workers gap has fallen from a peak of 5.9 million to 4.3 million,” the bank wrote, in a note looking ahead to 2023. The jobs-workers gap is simply total labor demand (so, employment plus job openings) minus labor supply (the labor force).

Obviously, the entirety of the above-mentioned decline is attributable to fewer openings, and the bank’s Alec Phillips and David Mericle noted that the drop is already “much larger than any in US history seen outside a recession.”

But it’ll have to get larger. Much larger. Indeed, the gap has to shrink all the way to two million, according to Goldman’s estimates, in order for labor market dynamics to be consistent with a rate of wage growth that’s sustainable and compatible with the Fed’s inflation target.

The implication: “The Fed still has a long way to go and will have to ensure that GDP growth remains below potential” next year, Phillips and Mericle said.

Consider that fair warning when it comes to any dovish inclinations you might be harboring relative to the dot plot and/or relative to the Fed’s insistence that rate cuts aren’t likely forthcoming. Also consider the above helpful context for next week’s crucial labor market data.