Navigating the Tension Between Inflation and Employment at the US Federal Reserve

The US Federal Reserve is tasked with promoting both stable prices and maximum employment, a unique dual mandate among central banks. However, as Federal Reserve Chair Jay Powell noted, navigating the tension between these two mandates presents a significant challenge in the year ahead. With inflation running above the Fed's 2% target and employment still below pre-pandemic levels, policymakers must balance their focus between controlling prices and stimulating economic growth.

Key Takeaways:

• Inflation has been "front loaded" in this economic cycle, with central bankers concerned that rising prices might become embedded in the economy.
• Research presented at the Fed's Jackson Hole Symposium showed that recovery in workforce engagement lags behind the decline in unemployment by months to years.
• A lack of understanding of cyclical trends in labour force participation may have contributed to policy errors and underemployment in the past.
• The Fed expects the same lagged recovery in labour force engagement during the current recovery, with pandemic-related disruptions potentially keeping people from returning to the labour market.
• Low labour force participation is not a good thing and it does not have to be this way, with robust and early policy support designed to speed the labour market recovery.
• The ratio of employment to population for people between the ages of 25 and 54 (prime age) never recovered the highs reached in the strong labour market of the late 1990s.
• Strong leadership, balanced analysis, and clear communication are necessary to get monetary policy right over the next few years, including a focus on maximum employment and giving time for the labour market to stage a full recovery.

Statistics:

• Unemployment is still below pre-pandemic levels.
• Inflation is running above the Fed's 2% target.
• 2% of people between the ages of 25 and 54 are not engaged in the workforce, compared with 4% before the pandemic.
• The labor force participation rate in the US has fallen behind other advanced economies.
• Millions of people who were working in early 2020 are no longer engaged in the workforce.
• The ratio of employment to population for people between the ages of 25 and 54 never recovered the highs reached in the strong labour market of the late 1990s.

Sources:

• European Central Bank forum
• Fed's Jackson Hole Symposium
• Treasury secretary Janet Yellen
• Federal Reserve Chair Jay Powell