In the late 1960s, U.S. economic policy makers misjudged how hot they could run the jobs market without fanning inflation. The miscue paved the way for an economically debilitating wage-price spiral the following decade.
Now, some economists are wondering whether Federal Reserve Chairman Jerome Powell and his colleagues are making the same mistake. They’re aggressively pushing for a return to the pre-pandemic labor market of half-century-low joblessness despite widespread worker shortages, rising wages and surging inflation.
“We could hit full employment earlier than people expect,” said Ethan Harris, head of global economics research at Bank of America Securities. “The risk of seriously overshooting the Fed’s 2% inflation target has grown a lot.”
Fed policy makers meeting this week are expected to decide to scale back their massive bond-purchase program as the economy continues to recover from the pandemic.
Powell acknowledged recently that the risks to inflation are “clearly” to the upside but stuck with his base case that price pressures will eventually ebb as supply-chain kinks are worked out. The personal consumption expenditures price index—the inflation gauge the Fed targets—rose 4.4% in September from a year earlier.
“We can be patient” in raising interest rates and “allow the labor market to heal,” Powell told a virtual panel discussion on Oct. 22.
The Fed chair, who will hold a post-meeting press conference on Wednesday, faces a conundrum when it comes to the labor market.
He recognizes that it’s “very tight by many measures.” Job openings are elevated and workers are leaving their employers for new opportunities in record levels.
But he’s also suggested that a lot of slack remains, pointing in particular to a 5 million shortfall in payrolls from the pre-pandemic level. Unemployment—at 4.8%—is well above February 2020’s 3.5%, while labor-force participation is down.
Powell is betting that the dichotomy will be resolved by Americans returning to work and filling some of the 10.4 million open job positions as Covid-19’s latest wave subsides. “My expectation is that jobs growth moves back up closer to the high levels we saw last summer and the reopening of the service sector continues,” he said.
The first test of those expectations will come on Nov. 5 with the release of the October jobs numbers. Payrolls are expected to show a 450,000 gain—bigger than September’s 194,000 but below the 1.03 million monthly average in June and July, according to the median forecast of economists polled by Bloomberg. Unemployment is forecast to edge down to 4.7%.
The risk for Powell is that Covid-19 has wrought more lasting changes to the jobs market than he apparently believes, making it difficult to return to pre-pandemic levels without spurring inflation. Some service-sector jobs may be gone forever, from downtown restaurant workers who used to serve fully staffed office buildings to maids in hotels no longer packed with business and other travelers.