Connect with us

Hi, what are you looking for?

Economy

Joblessness and the Fed

The US economy added more than half a million jobs in January, significantly exceeding forecasters’ expectations. A robust labor market complicates the narrative of an impending recession. But some commentators worry it might force the Fed into even-more-contractionary policy. Does the recent strong jobs report spell trouble for the Federal Reserve?

The prevailing wisdom among economic and financial journalists is that tight labor markets drive up inflation. They claim that the Fed can ease pricing pressures by raising its interest rate target or shrinking its balance sheet, but only at the cost of worse employment conditions. This view is sometimes expressed with reference to the Phillips curve, which old-school Keynesians took to mean there was an exploitable tradeoff between unemployment and inflation.

Thankfully, we don’t need to worry about the Phillips curve. The unemployment-inflation tradeoff doesn’t exist. Phillips curve reasoning — that big swings in aggregate demand can push joblessness up and inflation down — only makes sense as part of a macroeconomic paradigm that invalidates simplistic thinking about the so-called “menu of policy options.”

Fundamental economic performance, including output and employment, is determined on the supply side. Living standards depend on labor, capital, technology, and institutions. They do not depend on green pieces of paper or bank reserves. Monetary policy can determine the dollar’s purchasing power (or inflation, its rate of change), but it cannot make us richer or poorer in the long run.

Things are a little messier in the short run, where an unexpected change in monetary policy can affect incomes and jobs. But the way to think about this is as a deviation from a (supply side) trend. There is no need to fashion an entirely new (demand side) economic reality to account for nominal disturbances. 

The key word is “unexpected.” If households and businesses make their employment and production decisions based on a 2 percent long-run inflation rate, creating new money fast enough to result in 3 percent inflation may fool them into working and making more for a while. But once markets get wise to the game, the goods-and-services bonanza ends. The only permanent impact is an even-more-depreciated dollar.

Policymakers can’t choose inflation-unemployment combinations like they’re picking off a menu. The real (non-inflationary effects) of monetary policy are an artifact of policy unpredictability. In fact, if policy were credible, there would be almost no real effects of monetary policy! (“Almost” because even perfectly predicted inflation could induce investment and portfolio choices, such as economizing on cash and other non-interest-bearing dollar-denominated assets, that affect the allocation of resources.)

The best thing the Fed can do to fight inflation is rigorously commit itself to price stability. It should ditch its “average” inflation target, which it adopted in August 2020. Targeting 2 percent inflation on average only works if the Fed has the credibility to follow periods of overshooting with undershooting. It doesn’t. Chairman Powell and the FOMC have no intention of delivering less-than-2-percent inflation to offset nearly two years of higher-than-2-percent inflation. Instead, they will allow the price level to remain permanently elevated. Without a symmetric response to deviations from the target, the Fed’s so-called average inflation target will not produce 2 percent inflation on average. Instead, it will tend to produce inflation that exceeds 2 percent. That’s a far cry from price stability.







    Join our mailing list to get access to special deals, promotions, and insider information. Your exclusive benefits await! Enjoy personalized recommendations, first dibs on sales, and members-only content that makes you feel like a true VIP. Sign up now and start saving!





    By opting in you agree to receive emails from us and our affiliates. Your information is secure and your privacy is protected.

    You May Also Like

    Latest News

    Russia’s Arrest Warrant for Lindsey Graham: A Diplomatic Tug-of-War Unveils Deepening Tensions Article: In a startling turn of events, Russia has issued an arrest...

    Stock

    Mastering the Covered Calls Options Strategy: A Comprehensive Guide for Investors Introduction: Covered calls are a popular options strategy used by investors to generate...

    Latest News

    23 GOP-Led States Rally Behind Florida’s Challenge to Biden’s Policy on Migrants Released Without Court Dates Introduction: In a significant show of solidarity, 23...

    Investing

    Top 10 Manganese-producing Countries: A Look at the Global Leaders in Manganese Production (Updated 2023) Manganese is an essential metal used in various industrial...

    Disclaimer: Worldmarkettitans.com, its managers, its employees, and assigns (collectively “The Company”) do not make any guarantee or warranty about what is advertised above. Information provided by this website is for research purposes only and should not be considered as personalized financial advice. The Company is not affiliated with, nor does it receive compensation from, any specific security. The Company is not registered or licensed by any governing body in any jurisdiction to give investing advice or provide investment recommendation. Any investments recommended here should be taken into consideration only after consulting with your investment advisor and after reviewing the prospectus or financial statements of the company.


    Copyright © 2024 Worldmarkettitans.com