The rhetoric of Powell, along with Brainard and others, may give the appearance that the FOMC has been transformed: It now has a social conscience. In particular, they talk like never before about disparities in unemployment rates and income inequality.
But does it matter for the conduct of monetary policy? I have wondered about this, for example, in “Is The FOMC Carrying Out Social Policy?” This is a reconsideration of this topic, one with a more definitive conclusion. The answer is that, in the end, this focus is consistent with and supports the FOMC’s effort to achieve and sustain maximum employment, but it does not matter with respect to the conduct of monetary policy in coming years, including when the FOMC begins to gradually remove accommodation.
The Earlier View: We Don’t Have a Heart, Just a Mandate
When asked in a congressional testimony what I would do, as a governor, about income inequality, I said: “Nothing.” OK, I could have given a softer response, in retrospect. But my point was that the FOMC has a congressionally imposed mandate to promote full employment and price stability, and that precluded it playing an activist role in support of such social objectives, except, of course, in so far as pursuing that mandate contributed to those social objectives. Which, to be sure, it would.
The View at the Fed Today: We Care
It appears now that the Fed has grown a social conscience. This apparent transformation began under Yellen and has been advanced much further under Powell. Perhaps not surprising under the Obama appointee Yellen, but more so under the Trump appointee Powell. Who knew? Certainly not Trump!
Powell, but also Brainard and others, have consistently talked about disparities in unemployment rates across demographic groups and income inequality, important social problems in this country, although, today, not everyone appears to see it that way. In any case, monetary policy can advance the cause of narrowing these disparities.
Here are some examples of this rhetoric:
We’ve been quite attentive with respect to particular demographic groups in the labor market. Particularly, minorities tend to be very badly affected by downturns.
Yellen, December 2016
It is troubling that unemployment rates for these minority groups remain higher than for the Nation overall and that the annual income of the median African-American household is still well below the median income of other U.S. households.
Yellen testimony, June 2016
A clear takeaway from these events was the importance of achieving and sustaining a strong job market, particularly for people from low- and moderate-income communities.
Powell, Jackson Hole 2020
To be sure, I never talked like that!
Maximum Employment in the New Policy Framework
The new policy framework officially incorporates these social objectives as a concern of monetary policymakers, unlike the earlier one, and indeed made adjustments in the policy framework so that monetary policy could better advance them. There are two key features to the framework that contribute to these social objectives.
First, the new framework replaces the NAIRU with maximum employment as the FOMC’s employment objective. Maximum employment, in turn, is described as “broad and inclusive,” as opposed to the narrow U-3 unemployment rate (NAIRU). A broader and more inclusive objective is said to include a variety of additional measures of labor market experience, including—and a surprise here—demographic disparities in unemployment rates.
Second, the new framework specifies how to advance this objective: It precludes a preemptive policy response to a tightening labor market, which had previously been a core part of monetary policy strategy. Indeed, Powell had earlier emphasized the role of preemptive policy, as late as June 2019. Under the new framework, the FOMC commits to not raise rates in response to a decline in the unemployment rate. The mantra now is “Leave no employment opportunity behind.” Something the FOMC routinely did under the earlier framework.
Our revised statement emphasizes that maximum employment is a broad-based and
inclusive goal. This change reflects our appreciation for the benefits of a strong
labor market, particularly for many in low- and moderate-income communities.
Powell, Jackson Hole 2020
At outreach events we are holding across the United States, we are hearing loud
and clear that this long recovery is now benefiting low- and moderate-income
communities to a greater extent than has been felt for decades [this was a reference
to the Fed Listens events during the Review process].
Powell, July 2019
Does This Raise the Weight on the Employment Objective?
It may appear so, and some have interpreted the new framework in this way. That would be quite a turnaround. But the new framework in fact moves in the opposite direction. Indeed, the new framework was designed to ensure that inflation expectations remain anchored at the 2% objective, even during periods of persistent low inflation.
The new framework shifts the employment objective away from the NAIRU so as to preclude a preemptive policy response to a low unemployment rate. In the new framework, it will take a (sustained) increase in realized inflation to 2% and then an expected overshoot of the 2% objective for the FOMC to tighten monetary policy. Brainard, Clarida, and Powell agree about this.
Our new monetary policy framework recognizes that removing accommodation preemptively as headline unemployment reaches low levels in anticipation of inflationary pressures that may not materialize may result in an unwarranted loss of opportunity for many Americans…the shortfalls approach means that the labor market will be able to continue to improve absent high inflationary pressures or an unmooring of inflation expectations to the upside.
Brainard, February 2021
A low unemployment rate, in and of itself, will not be sufficient to trigger a tightening of monetary policy absent any evidence from other indicators that inflation is at risk of moving above mandate-consistent levels.
Clarida, May 2021
Recognizing the economy’s ability to sustain a robust job market without causing an unwanted increase in inflation, the statement says that our policy decisions will be informed by [the perceived shortfall from maximum employment]…This means that we will not tighten monetary policy solely in response to a strong labor market.
Powell, February 2021
In other words: Inflation, inflation, inflation.
If monetary policy is about the dual mandate exclusively, why the new rhetoric?
This is an interesting and somewhat challenging question. Indeed, I had to think hard about this before offering possible reasons.
First, it presents a message of caring to the public, that the Fed isn’t some cold institution without a heart, but has a social conscience. Indeed, it is an institution that has values that are widely held (or previously were widely held) by the public, such as reducing income inequality.
Second, this rhetoric is especially important for the progressives who want to change the mandate of the FOMC to use monetary policy to narrow disparities in unemployment rates and reduce income inequality. Expressing a commitment to the social objectives can, perhaps, keep these progressive Democrats at bay.
Third, all the social values expressed by the Committee are promoted by achieving the highest level of employment, maximum employment, that does not threaten the price stability goal. But maximum employment, in the end, still effectively corresponds to the NAIRU. Improvement in all these broader indicators of labor market experience is
promoted by a lower unemployment rate, which in turn is promoted by more accommodative monetary policy. There’s no tool to target only certain indicators. Identifying the social benefits of achieving and sustaining maximum employment—in effect, unemployment at the NAIRU—helps to explain to the public that the FOMC wants to provide every possible job opportunity, short of threatening its price stability goal.
The maximum employment objective speaks to those progressives inside and outside Congress who believe the Fed has no heart and should do more to promote social objectives that a polarized Congress won’t. Perhaps it communicates that the Fed really has a heart—at least up to the point where labor market conditions threaten the price stability objective.
The bottom line is a message to those who worry that the focus on maximum employment will pull the FOMC away from the traditional and congressionally mandated objectives of maximum employment and price stability: Not a chance.