In contrast to other major central banks, the Fed pays much more attention to the state of the labour market. This reflects the Fed’s “dual” objectives of maximum employment and stable prices.1 In fact, Congress has given the Fed a third goal of “moderate long-term interest rates”. But when inflation is low, so are long-term interest rates, so the price stability and moderate long-term interest rates objectives go together.
Historically, central banks have geared monetary policy to the overall economy. In the case of the Fed, that has meant it has focused on the broad labour market and not on any particular segment. For instance, it has downplayed, if not disregarded, the fact that any increase in unemployment would not affect all types of workers in the same way.
Following completion in the summer of 2020 of its monetary policy strategy review, that position has changed in ways that will impact on how the Fed sets monetary policy. In summarising the review, Chairman Powell emphasised that the benefits of a tight labour market had become clear in the years before the Covid pandemic:
… the robust job market was delivering life-changing gains for many individuals, families, and communities, particularly at the lower end of the income spectrum. In addition, many who had been left behind for too long were finding jobs, benefiting their families and communities, and increasing the productive capacity of our economy.2
Importantly, he went on to say inflation had not risen significantly, despite the historically tight labour market. In more recent commentary, he has again emphasised the benefits of a strong labour market, particularly for many in low - and moderate - income communities.3
The upshot of the Fed’s changed labour market focus is that to judge the prospects of FOMC action, market commentators need to concentrate on developments in weaker segments of the US labour market as well as overall labour market conditions. From Chairman Powell’s speeches, three such indicators appear particularly important.
The first is the black unemployment rate. As the figure below shows, it rose much more than overall unemployment after the Global Financial Crisis (GFC) in 2008-9, but declined gradually to 5.2% by August 2019. It shot up to 16.7% in April and May 2020 during the Covid pandemic last year, reaching 9.9% in February this year. From Chairman Powell’s speeches it is clear the Fed will want it to fall much further, as long as inflation does not rise sharply. This will require a continuation of the current highly expansionary monetary policy.
