The pandemic’s destruction of US employment was not the trigger for the new Federal Reserve policy framework, in the works long before the virus hit.
However, the jobs crisis is a perfectly appropriate context for the focus on employment. That focus had already become the hallmark of the Jay Powell era – and now it becomes the Fed’s daunting and firmly institutionalised challenge, restoring full employment.
If there had been any lingering holdouts among Fed participants, the new policy framework has convincingly transformed full employment into more than a Powell primary initiative. It is now the full-throated top imperative of the entire institution.
An unemployment crisis? As the morning’s report on fresh applications for unemployment benefits showed, there are a staggering 14,535,000 people without a job getting the government payments. And that is only the so-called insured unemployment. It is far short of actual unemployment.
Lowering inflation and inflation expectations are now acknowledged to be a greater threat than accelerating price pressure, the pandemic’s brutal effect on unemployment can only add impetus to the Fed policymakers’ unanimous affirmation: that the US central bank’s primary focus will be rebuilding employment. It may take years.
It had gradually become implicit in recent years and now it’s engraved in granite, at least until the next framework review in five years. The Fed can stop worrying so much about reaching a 2% inflation target that in any event has proven to be unobtainable. Any undercover inflation hawks may find themselves under more resolute peer pressure.
As Fed Chair Powell said Thursday, in the unlikely event the inflation rate any time soon breaches 2% and accelerates beyond whatever is the top of the new symmetric range, the Fed will always remain ready to clamp down and raise rates.
Realistically, the net result is that it’s more likely than ever that for the next few years rate hikes are off the table.
When the policy framework is reviewed in 2025 or 2026 the hope is that the central bank will have been able to return to what used to be more normal considerations, back before many millions of Americans were forced into unemployment. The financial crisis had already created a sizable cohort of permanently unemployed left to age out of the workforce. What the remnant jobless will be this time is still anyone’s guess.
There was another recalibration buried in the day’s announcement. Included was not only the language recalibrating the relationship of its inflation and employment mandates, but how they are being somewhat subsumed by a more tangible policy context of concern for financial stability – particularly timely in view of the pandemic’s second or third wave threats to the fabric of the financial system.
“Sustainably achieving maximum employment and price stability depends on a stable financial system. Therefore, the Committee’s policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the committee’s goals,” the Fed’s new policy framework says.
Should record highs for the S&P 500 and Nasdaq – renewed intraday as Powell was speaking Thursday – eventually lurch into a sizable pullback, the dominant perceptions of a “recovery” would quickly evaporate.
“Restoration” would become the aspirational watchword while the long-range component of unemployment, bankruptcies, evictions and food insecurity would weigh on the outlook, imperil confidence and alter business models – even if doses of vaccine were being distributed.