The Federal Reserve is acknowledging that it is stuck between the rock of high inflation and the hard place of an unusual jobs market as it weighs its approach to pulling its pandemic-era policies of easy money.
At a conference in New York on Friday, current and former Fed officials appeared to be in agreement that it was time for the central bank to begin raising short-term interest rates in the face of high inflation.
“I agree the current stance of monetary policy is wrong-footed and needs substantial adjustment,” said Chicago Fed President Charles Evans. He pointed to the “dramatic” pace of price increases underscored by inflationary readings in the U.S. at levels not seen in 40 years.
But amid criticism that the Fed did not move fast enough to quell widespread inflation, Fed officials noted that the tolerance of rising inflation in the second half of 2021 was in the best interest of a full recovery in the jobs market.
Following the post-2008 financial crisis, the Fed acknowledged that historically disadvantaged groups in the U.S. labor market did not get pulled back into jobs until the later innings of the recovery.
“There have been clear improvements for less advantaged groups in terms of longer-term labor market trends,” said Fed Governor Christopher Waller, noting that Black and Hispanic workers particularly benefit from allowing extended economic expansions.
The Fed faces the same dilemma as it readies to raise interest rates. The Black unemployment rate sits at 6.9% and the Hispanic rate at 4.9% as of January, above the national unemployment rate of 4.0%. At the same time, the economy has historically high levels of hiring demand, with 10.9 million unfilled jobs as of December.
A mistake?
The Fed has made it clear that it is still intent on raising interest rates this year. The question, as it relates to the risk of abruptly terminating the labor market recovery, concerns how aggressively the Fed needs to move to simultaneously be effective on curbing inflation.
A number of former Fed officials say they should have moved earlier. Frederic Mishkin, who served as a Fed governor from 2006 to 2008, cautioned that high inflation hurts disadvantaged groups too.
“We’ve learned a lot from this outcome-based policy, or what I call ‘non-preemptive policy,’” Mishkin said. “It’s a mistake.”
Former New York Fed President Bill Dudley added that the Fed may be setting up the labor market for a more unpleasant shock if a late response to inflation forces the Fed to more abruptly tighten policy.
“The Fed’s track record of accomplishing soft landings by pushing up the unemployment rate is essentially zero,” Dudley said.
Still, Fed officials appear only lukewarm to one proposal to move more quickly to address inflation: a double rate hike, meaning 0.50%. The Fed has not raised interest rates in increments larger than 0.25% at a time since 2000.
St. Louis Fed President Jim Bullard said he would support such a move in the central bank’s next policy-setting meeting on March 16, but it does not appear all of his colleagues feel the same.
New York Fed President John Williams, Dudley’s successor and a voice close to Fed Chair Jerome Powell, suggested he is supportive of raising rates in March but not by 50 basis points.
“I don't see any compelling argument to take a big step at the beginning,” Williams told reporters on Friday.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.
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