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  • Peter Stella

Living Macro Policy in the Fast Lane with J n J


In several ways Janet Yellen and Jay Powell are a macro policy duo unique in American history, owing both to their relative aversion to unemployment vs inflation and the situation within which they find themselves—and it is perhaps not by chance that they are where they are at this point in history.


Both Js seem determined to use policy tools at their disposal to address unemployment.

Secretary Yellen, an accomplished labor economist, has recently noted the scars that result from long-term unemployment. Research on the long-term unemployed suggests that they rarely make up all the lost time vis-à-vis their occupation path. Their lifetime income is likely to be less and the last rung in the ladder of their occupational life to be lower than those who do not experience long-term unemployment. Hence the unemployment rate is more than a mere number in a formula.


Regarding Chairman Powell, I have noticed over the past 18 months or so what appears to be a genuine appreciation of the transformative effect low unemployment—ample jobs—can have on disadvantaged regions and communities. His references to the impact Fed outreach events in such communities have had on him is palpable in his public speaking.

Both Js thus have a more profound concern with unemployment than “technocrats” have had in the past—in Jay’s view, particularly with demographic subgroups of the labor force, in Janet’s with the long-term unemployed. Consequently, I believe they will be more willing to run the risk of a tad too much inflation to achieve their unemployment goal, more so than any such duo in modern American history.


Preferences are not the only unique aspect of the current policy situation.


The aim of policy at the current moment, March 2021, is probably more ambitious than it has been at any time in the last 50 years. By that I mean the target for “full employment” is lower than it has been for an exceptionally long time. Partly that is because of the more ample demographic to which the notion is being defined than ever before, “maximum inclusive employment”[1] and partly because it seems the lowest unemployment rate that can be achieved without accelerating inflation[2] in the United States is much lower than economists have thought for more than a generation.


In 2019, US unemployment averaged 3.7 percent while inflation averaged 1.8 percent. The last time the 5-year moving average US unemployment rate was lower than in 2019 (4.42 percent) was in 1969 (4.37) but at that time the 5-year moving average inflation rate was almost 3X as high, 4.5 percent compared with 1.6 percent.


Economists of a certain generation well remember those 1960s unemployment rates presaged the high inflation experienced in the 1970s[3].


Thus, US policymakers appear determined to attain an extremely ambitious target—a return to historically high employment—and willing to risk higher inflation to do so.


The third circumstance that is relevant is the “cover” provided by the Federal Reserve’s new operating procedures. In a nutshell, the Fed has announced it is aiming to hit its inflation target, not afresh each year, regardless of the past, but to attain it only on average over several years. Thus, lower than target inflation in past years would justify higher than target inflation in future years. In a very real sense this has already provided the motivation for missing the inflation target on the high side going forward.


The Fed and the Treasury are riding in the fast lane determined to reach a distant unemployment objective without a serious confrontation with the inflation police. An inflation hawkish duo would see flashing red lights 100 meters behind them, change lanes and slow down; an average duo might wait until the danger is 50 meters behind; a dovish duo 25 meters. This pair seems intent on pressing on even when the flashing red lights are right behind them and calls to pull over are audible. Are they more willing to take on the risk of a fender bender with inflation than past generations? It certainly seems so—and if they are pulled over, they can always produce the document that states they only ever had to obey the speed limit on average anyway.


©Peter Stella

All Rights Reserved

Central Bank Archaeology

March 2021

[1] See Levy, Mickey and Charles Plosser (2020), The Murky Future of Monetary Policy. [2] Also known as “NAIRU”. [3] Inflation averaged 7 percent that decade and was 13.6 percent in 1980.

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