The Federal Reserve, Unemployment, and Inflation

May 11, 2021
The Federal Reserve, Unemployment, and Inflation

Something that has caught my eye and feeds into the inflation question, “Will inflation return on a more sustained basis?”, is the possibility that the Federal Reserve is on the verge of staying with their easy money policies too long. If this is the case, it may lead to building inflation pressure to remain on the scene longer than some currently suspect. 

The Fed has two congressionally backed mandates that give it direction and power. These two mandates are price stability and full employment. In other words, the Fed is to manage the influences behind the Phillips Curve, a concept where low levels of unemployment are supposed to lead to higher inflationary pressure, and vice versa. It has become apparent that, of the two mandates, the full employment mandate is receiving priority.   

The Fed’s extraordinarily easy policies are helping to lead to a resurgence in economic activity, the likes of which our economy hasn’t seen in 40 years. The official employment picture isn’t picking up as rapidly as economic growth. By latest count, there are about 3 million fewer workers with jobs in the U.S. today than prior to the pandemic. At the same time, economic output is back to where it was at that time1.

Let’s ask a reasonable question. “Do the federal unemployment numbers count the available workers, those who are ready, willing and able to come back to work given an acceptable job offer?” We know there are employers who can’t find workers and people who are willing and able to come back to work.  Additionally, I am seeing detailed data, some of which was recently reported in an article in Barron’s that quoted a report from Bank of America on the jobs market.2

Digging in the Weeds

Enhanced unemployment benefits from the Biden administration have led to the ability of many workers to comfortably stay at home. The newly found freedom is being financed largely by the government’s new support programs, which are being financed by the Fed’s creation of new money. Eventually, rising taxes will contribute to the funding of these unemployment benefits. If the Fed’s full employment mandate leads them to these actions, where are we with labor market data, given the improvement we have witnessed in the jobs market over the last number of months? 

According to data from the end of March, employment remains more than 8 million jobs below the levels reached prior to the pandemic. With the high unemployment numbers, why are businesses finding it hard to attract people to fill their positions? 

In total, Bank of America estimates that among the 9.7 million workers reported as unemployed, there are another 4.6 million workers that are not in the labor force due to the pandemic.

Federal Reserve Chairman Powell has been speaking of excess slack in the labor market. I suggest much of the slack he speaks of won’t come back into the labor force until people are convinced that COVID worries are no longer operative, or unemployment benefits are dramatically reduced. Given neither of these issues are on the immediate horizon, where is the slack Powell is speaking of? 

In the meantime, the Fed continues to pump money into the system, because we don’t have a full employment economy, risking overheating economic activity and launching a renewed round of inflationary pressure that may not vanish rapidly.    

We all have heard the stories of employers having a hard time finding people who are willing to work. Now we know why. Unintended consequences, indeed. 

Some facts to consider, according to c/net Personal Finance: An unemployed person in Arizona (my home state) is eligible to receive up to $540 per week in unemployment. That equates to $13.50 per hour for a 40-hour workweek, and the first $10,000 in benefits is fully non-taxed. Ask yourself, “With the proposed minimum wage at $15 per hour, and you are paid $13.50 to stay at home, would you be willing to go to work for a mere $1.50 per hour?” Again, unintended consequences. 

Not Unintended – But Intended

I suspect the government knows exactly what they are doing – they are forcing the private sector to raise wages to something well above $15 per hour. I find it hard to believe the government will simply let these benefits lapse anytime soon.

If true, this is a risky strategy. Is the Fed, with their continued largesse of 0% interest rates and $120 billion in monthly bond purchases, emphasizing the full employment mandate too aggressively? Are we approaching the time when the Fed will need to start emphasizing the stable pricing mandate?    


1Bureau of Labor Statistics

2,3Barron’s: Flood of Liquidity is Sweetening Retirement for Stock Owners, Home Sellers

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