Fortifying employment would exacerbate inflation
Howard Schneider 23[Howard Schneider, Covers the U.S. Federal Reserve, monetary policy and the economy, a graduate of the University of Maryland and Johns Hopkins University with previous experience as a foreign correspondent, economics reporter and on the local staff of the Washington Post, "Fed's 'inclusive' jobs promise hits inflation control reality",3-18-2008, Reuters, https://www.reuters.com/markets/us/feds-inclusive-jobs-promise-hits-reality-inflation-control-2023-01-06/, 1LEE]
Aiming to fortify broad labor market gains among U.S. minority groups over the previous decade, Federal Reserve Chair Jerome Powell in 2020 engineered a historic promise to try to maintain that progress by giving "broad-based and inclusive" employment a status equal if not superior to the central bank's pledge of low inflation.
Amid a still-raging escalation in prices, however, that commitment has taken a blow. Officials at the Fed's Dec. 13-14 policy meeting acknowledged an economic slowdown needed to thwart inflation also meant "the unemployment rate for some demographic groups - particularly African Americans and Hispanics - would likely increase by more than the national average."
It was a stark admission that highlights the dilemma the Fed faces as it balances a battle with the worst outbreak of inflation since the 1980s against possible damage to the second goal of its "dual" mandate: full employment across society.
Data on Friday showed 223,000 jobs were added in December, about double what the Fed feels is sustainable. Wages continued to rise, though at a more moderate rate, and unemployment rates for Blacks and Hispanics held near record-low levels. The longer that job market strength persists, the more Fed officials may feel compelled to break it with ever-higher interest rates.
"The view that labor markets remain too tight is the consensus shared by both hawks and doves," Tim Duy, chief U.S. economist at SGH Macro Advisors, wrote following the release on Wednesday of minutes from the December meeting that he felt showed the Fed "willing to bear the costs" of forcing the unemployment rate higher.
"I don't think we can understate the importance of labor market outcomes," Duy wrote. "If the labor market doesn't soon slow markedly, the Fed will need to push policy rates" beyond the 5.00%-5.25% range most officials now see as an endpoint.
The new framework aimed to fix that with a built-in bias against raising rates until inflation had not just returned to the 2% level but exceeded it, allowing loose credit to power the economy, and prices, higher. In theory, more jobs and lower joblessness would also result.
That approach, embodied in policy statements in the critical months when rising inflation took hold in 2021, has been criticized as anchoring the Fed to a course of action officials were too slow to abandon.
Policymakers have acknowledged as much, even as they also argued it would have made little difference if they had mobilized against inflation a few months earlier.
What they fear developing now is a different problem altogether: Inflation that may become driven by the very labor market conditions they promised to encourage.