Fed's pandemic-era vow to prioritize employment may soon be tested
By Howard Schneider
WASHINGTON, Aug 19 (Reuters) -Four years after Federal Reserve Chair Jerome Powell made fighting unemployment a bigger priority during the COVID-19pandemic, he faces a pivotal test of that commitment amid rising joblessness, mounting evidence inflation is under control, and a benchmark interest rate that isstill the highest in a quarter of acentury.
High interest rates may be on the way out, with the U.S. central bank expected to delivera first cut at its Sept. 17-18 meeting and Powell potentially providing more information about the approach to the policy easing in a speech on Friday at the Kansas City Fed's annual conference in Jackson Hole, Wyoming.
But with the Fed's policy ratein the 5.25%-5.50% rangefor more than a year, the impact of relatively high borrowing costson the economy may still be building and could take time to unwind even if the central bank starts cutting - a dynamic that could put hopes for a "soft landing" of controlled inflation alongside continued low unemployment at risk.
"Powell says the labor market is normalizing," with wage growth easing, job openings still healthy, and unemployment around what policymakers see as consistent with inflation at the central bank's 2% target, former Chicago Fed President Charles Evans said. "That would be great if that is all there is. The history is not good."
Indeed, increases in the unemployment rate like those seen in recent months are typically followed by more.
"That does not seem the situation now. But you may only be one or two poor employment reports away" from needing aggressive rate cuts to counter rising joblessness, Evans said. "The longer you wait, the actual adjustment becomes harder to make."
INFLATION VERSUS EMPLOYMENT
Evans was a key voice in reframing the Fed's policy approach, unveiled by Powell at Jackson Hole in August 2020 as the pandemic was raging, policymakers were gatheringvia video feed, and the unemployment rate was 8.4%, down from 14.8% that April.
In that context the Fed's shift seemed logical, changing a long-standing bias towards heading off inflation at the expense of what policymakers came to view as an unnecessary cost to the job market.
Standard monetary policymaking saw inflation and unemployment inextricably and inversely linked: Unemployment below a certain point stoked wages and prices; weak inflation signaled a moribund job market. Officials began to rethink that connection after the 2007-2009 recession, concluding they needn't treat low unemployment as an inflation risk in itself.
As a matter of equity for those at the job market's margins, and to achieve the best outcomes overall, the new strategy said Fed policy would "be informed by assessments of the shortfalls of employment from its maximum level."
"This change may appear subtle," Powell said in his 2020 speech to the conference. "But it reflects our view that a robust job market can be sustained without causing an outbreak of inflation."
A pandemic-driven inflation surge and dramatic employment recovery made that changeseem irrelevant: The Fed had to raise rates to tame inflation, and until recently the pace of price increases had slowed without much apparent damage to the job market. The unemployment rate through April had been below 4% for more than two years, an unparalleled streak not seen since the 1960s. The unemployment rate since 1948 has averaged 5.7%.
But the events of the last two years, and a coming Fed strategy review, have also triggered a wave of research into exactly what happened: why inflation fell, what role policy played in that, and how things might be done differently if inflation risks rise again.
While the agenda for this year's conference remains under wraps, the broad theme focuses on how monetary policy influences the economy. That bears on how officials may evaluate future choices and tradeoffs and the wisdom of tactics like preempting inflation before it starts.
Some of that work is already emerging from Fed researchers, including top economist Michael Kiley. He hasauthored a paper questioning whether policy "asymmetry" - treating employment shortfalls differently than a tight labor market, for example - really helps. Another recent paper suggested policymakers who believe public inflation expectations are formed in the short-run and are volatile should react sooner and raise rates higher in response.
The role public expectations play in driving inflation - and the policy response - was on full display in 2022. When it appeared expectations risked moving higher, the Fed pushed its tightening cycle into overdrive with 75-basis-point hikesat four consecutive meetings. Powell then used a truncated Jackson Hole speech to emphasize his commitment to fight inflation - a stark shift from his jobs-first commentary two years earlier.
It was a key moment that put the U.S. central bank'sseriousness on display, underpinned its credibility with the public and markets, and rebuilt some of the standing that preemptive policies had lost.
'TOO TIGHT'
Powell now faces a test in the other direction. Inflation is progressing back to 2%, but the unemployment rate has risen to 4.3%, up eight-tenths of a percentagepoint from July 2023.
There's debate over what that really says about the labor market versus rising labor supply, a positive thing if new job seekers find employment.
But it did breach a rule-of-thumb recession indicator, and while that has been downplayed given other indicators of a growing economy, it also is slightly above the 4.2% that Fed officials regard as representing full employment.
It's also higher than at any point in Powell's pre-pandemic months as Fed chief: It was 4.1% and falling when he took over in February 2018.
The "shortfall" in employment that he promised to respond to four years ago, in other words, may already be taking shape.
While Powell will be reluctant to ever declare victory over inflation for fear of touching off exuberant overreaction, Ed Al-Hussainy, senior global rates strategistat Columbia Threadneedle Investments, said it was past time for the Fed to get in front of the risk to unemployment - preemption of a different sort.
Al-Hussainy said the Fed had proved its ability to keep public expectations about inflation in check, an important asset, but that "also has put in motion some downside risk to employment."
"The policy stance today is offside – it is too tight – and that warrants acting on."
Graphic-Rates and inflation https://tmsnrt.rs/3U8HdD2
Graphic-Higher for longer? https://tmsnrt.rs/41d2UWm
Graphic-Powell's policy sprint, a pivot, and a reset https://tmsnrt.rs/3qQdxgq
Graphic-Hiring continues to slow https://tmsnrt.rs/3deZoGA
Graphic-U.S. unemployment rate: Higher means higher https://tmsnrt.rs/3R5TFBF
Reporting by Howard Schneider;
Editing by Dan Burns and Paul Simao
Τελευταία νέα
Δήλωση αποποίησης ευθύνης: Οι οντότητες του ομίλου XM Group παρέχουν υπηρεσίες σε βάση εκτέλεσης μόνο και η πρόσβαση στην ηλεκτρονική πλατφόρμα συναλλαγών μας που επιτρέπει στον ενδιαφερόμενο να δει ή/και να χρησιμοποιήσει το περιεχόμενο που είναι διαθέσιμο στην ιστοσελίδα μας ή μέσω αυτής, δε διαφοροποιεί ούτε επεκτείνει αυτές τις υπηρεσίες πέραν αυτού ούτε προορίζεται για κάτι τέτοιο. Η εν λόγω πρόσβαση και χρήση υπόκεινται σε: (i) Όρους και προϋποθέσεις, (ii) Προειδοποιήσεις κινδύνου και (iii) Πλήρη δήλωση αποποίησης ευθύνης. Ως εκ τούτου, το περιεχόμενο αυτό παρέχεται μόνο ως γενική πληροφόρηση. Λάβετε ιδιαιτέρως υπόψη σας ότι τα περιεχόμενα της ηλεκτρονικής πλατφόρμας συναλλαγών μας δεν αποτελούν παρότρυνση, ούτε προσφορά για να προβείτε σε οποιεσδήποτε συναλλαγές στις χρηματοπιστωτικές αγορές. Η πραγματοποίηση συναλλαγών στις χρηματοπιστωτικές αγορές ενέχει σημαντικό κίνδυνο για το κεφάλαιό σας.
Όλο το υλικό που δημοσιεύεται στην ηλεκτρονική πλατφόρμα συναλλαγών μας προορίζεται για εκπαιδευτικούς/ενημερωτικούς σκοπούς μόνο και δεν περιέχει, ούτε θα πρέπει να θεωρηθεί ότι περιέχει συμβουλές και συστάσεις χρηματοοικονομικές ή σε σχέση με φόρο επενδύσεων και την πραγματοποίηση συναλλαγών, ούτε αρχείο των τιμών διαπραγμάτευσής μας ούτε και προσφορά ή παρότρυνση για συναλλαγή οποιωνδήποτε χρηματοπιστωτικών μέσων ή ανεπιθύμητες προς εσάς προωθητικές ενέργειες.
Οποιοδήποτε περιεχόμενο τρίτων, καθώς και περιεχόμενο που εκπονείται από την ΧΜ, όπως απόψεις, ειδήσεις, έρευνα, αναλύσεις, τιμές, άλλες πληροφορίες ή σύνδεσμοι προς ιστότοπους τρίτων το οποίο περιέχεται σε αυτήν την ιστοσελίδα παρέχεται «ως έχει», ως γενικός σχολιασμός της αγοράς και δεν αποτελεί επενδυτική συμβουλή. Στον βαθμό που οποιοδήποτε περιεχόμενο ερμηνεύεται ως επενδυτική έρευνα, πρέπει να λάβετε υπόψη και να αποδεχτείτε ότι το περιεχόμενο δεν προοριζόταν και δεν έχει προετοιμαστεί σύμφωνα με τις νομικές απαιτήσεις που αποσκοπούν στην προώθηση της ανεξαρτησίας της επενδυτικής έρευνας και ως εκ τούτου, θα πρέπει να θεωρηθεί ως επικοινωνία μάρκετινγκ σύμφωνα με τους σχετικούς νόμους και κανονισμούς. Παρακαλούμε εξασφαλίστε ότι έχετε διαβάσει και κατανοήσει τη Γνωστοποίησή μας περί Μη ανεξάρτητης επενδυτικής έρευνας και την Προειδοποίηση ρίσκου όσον αφορά τις παραπάνω πληροφορίες, τις οποίες μπορείτε να βρείτε εδώ.
