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Fed Struggles to Maintain Inclusive Employment Goals as Inflation Rises

The Federal Reserve, led by Chair Jerome Powell, made a historic commitment in 2020 to prioritize inclusive employment, or the promotion of broad labor market gains among minority groups in the US, just as highly as the central bank's goal of low inflation.


However, this commitment has been challenged as officials at the Fed's December policy meeting admitted that efforts to slow down the current economic slowdown and combat rising inflation may result in higher unemployment rates among certain demographic groups, particularly African Americans and Hispanics.

This admission highlights the difficult decision the Fed must make as it tries to achieve both goals of its "dual" mandate: low inflation and full employment across society. Data released on Friday is expected to show that 200,000 jobs were added in December, twice the number the Fed considers sustainable, with wages increasing and unemployment rates for Black and Hispanic individuals at or near record lows. The longer this strength in the job market continues, the more likely Fed officials will feel the need to disrupt it with higher interest rates.

"If the labor market doesn't soon slow markedly, the Fed will need to push policy rates" beyond the current range of 5.00%-5.25%, which many officials see as the endpoint, according to Tim Duy, Chief US Economist at SGH Macro Advisors. The current target federal funds rate is set at a range of 4.25%-4.50%.

COVID-19 Pandemic Confounds Central Bankers' Expectations for Job Market

The job market during the COVID-19 pandemic has been unpredictable for central bankers, much like inflation. Early predictions that a large influx of workers returning to the labor market would ease hiring and wage conditions have not come to fruition. The labor force participation rate is still below its pre-pandemic level, and some officials believe that the supply of available workers "appears to be constrained," according to the December meeting minutes.

Despite economic uncertainty, there is still a strong demand to hire, with more job openings than individuals looking for work. This could lead to steadily rising wages, but the Fed's focus on the labor market as a potential source of future inflation is not without controversy. Some economists and policymakers argue that the sources of inflation are elsewhere and do not require significantly higher unemployment to address. Fed Vice Chair Lael Brainard has pointed to large corporate profit margins as a contributing factor. In contrast, Minneapolis Fed President Neel Kashkari has likened the current situation to "surge pricing," in which companies like Uber increase prices during periods of high demand and limited supply.

Others argue that it may be difficult to fully return to a 2% inflation rate and that the cost of growth and employment of reaching that final increment may be too high. The Fed projects that the unemployment rate will rise to 4.6% by the end of 2023, an increase typically associated with a recession, though not a severe one. However, the minutes from the December meeting may indicate that even harsher consequences for employment could be on the horizon, challenging the job-centered framework officially adopted by the Fed in 2020.