Federal Reserve officials are moving on to their next big policy debate: defining their “broad and inclusive” maximum-employment goal that they have pledged to reach before raising interest rates.
With Chair Jerome Powell and colleagues paving the way to slowing their massive asset-purchase program this year, attention will turn to when they will hike rates for the first time since 2018.
Seven of 18 policy makers wanted to raise in 2022 and that number could grow when the Fed releases updated economic forecasts next month.
The discussion could be an even more heated argument than discord over scaling back bond purchases. That’s because the Fed’s overhaul of monetary policy last year didn’t spell out a numeric definition for the minority unemployment rates that would meet their new goal.
“It is going to be an issue,” said Derek Tang, an economist at L.H. Meyer Inc. in Washington. “What does broad and inclusive mean? It is going to be a very ugly fight.”
At stake is just how hot officials are willing to let the labor market run before they start to shut off support of cheap money.
Act too soon and the minority and less educated workers Powell now includes in the policy calculus could miss out on jobs and wage gains. Act too late and inflation could accelerate, pushing the Fed to respond with force, harming labor market gains.
August’s employment report, due on Friday, isn’t likely to clarify the labor-market picture as the delta variant weighs on consumer sentiment and schools are just starting to reopen.
Jobs data for July, for example, showed a large 1 percentage-point drop in the Black unemployment rate. But Black labor-force participation also fell nearly a percentage point.
Falling participation as people drop out of the workforce subtracts from the unemployment rate because they aren’t counted in the jobless numbers. It will take months for officials to sort out what the trend participation might be and any conclusion will be tentative.
At the central bank’s annual Jackson Hole conference on Aug. 27, Powell described an optimistic outlook for the labor market “with high levels of employment and participation, broadly shared wage gains, and inflation running close to our price-stability goal.”