Jerome Powell wants to quell inflation without sinking the labor market. Success or failure will be a defining part of the Federal Reserve chair’s legacy and the pro-employment policy he’s championed.
“Can we cool down -- sort of -- labor demand without causing employment to fall?” Fed Governor Christopher Waller said on April 11. He sounded cautious, calling interest rate policy a “brute force” hammer that sometimes breaks things: “That’s the tricky road that we’re on.”
What happens to the U.S. job market, where unemployment currently stands at an ultra-low 3.6%, will rank alongside Powell’s widely praised emergency pandemic response in dictating how history records his two terms at the helm of the world’s most powerful central bank.
Powell will have one of the final words on the imminent policy outlook before the U.S. central bank enters its usual pre-meeting blackout when he addresses an International Monetary Fund panel on Thursday. The Fed next meets May 3-4.
The careful response of the Fed to surging price pressures has been slammed by some for being too slow. But it was rooted in an approach the central bank called its new framework, adopted in August 2020 as the economy still grappled with Covid-19.
That policy explicitly repented from pre-emptive strikes on distant inflation threats that left workers -- often from minority communities -- mired in jobless recoveries by slowing the economy too soon.
The Fed carried the framework into the post-Covid expansion, pledging not to raise rates off zero until the labor market reached maximum employment. Both the jobs market and inflation overshot rates that the Fed estimates are sustainable.
Powell recently described the labor market as “tight to an unhealthy level,” citing more than 1.7 job openings for every unemployed person. Inflation measured by the Fed’s favored gauge rose 6.4% for the 12 months ending February, more than three times the Fed’s target of 2%.
If the framework delivers neither stable prices nor maximum employment -- no matter what shocks arise -- that raises questions about how much future support it will have and whether it needs to change.
“The framework didn’t look ahead to these circumstances. It encompasses risk management but only in a very limited sense,” said Derek Tang, an economist at LH Meyer, a policy-analysis firm in Washington. “I am not sure it is going to survive in its current form until the next review.”