Does the new Fed chair care about jobs?

0:01NPR.

0:06This is The Indicator from Planet Money. I'm Darian Woods. I'm Waylon Wong and welcome to Jobs Thursday. Jobs Thursday. Yes, the Bureau of Labor Statistics released its numbers for the month of June today. It's a day earlier than usual because of the July 4th holiday. So we're sending you into the long weekend with a look at the labor market. The U.S. economy added 57 ,000 jobs in June, and the unemployment rate was 4.2 percent. That's mostly unchanged from May's rate of 4.3 percent. As you know, we make a point of studying the jobs numbers every month because it tells us how workers in the U.S.

0:42are doing. The Federal Reserve cares a lot about the employment numbers, too. In fact, it's legally obliged to care about jobs. That's because Congress gave the Fed what's known as a dual mandate. stable prices and maximum employment. But last month, new Fed chair Kevin Walsh presided over his first interest rate decision and press conference. And he had a lot to say about stable prices. Price stability. Price stability. Price stability. Price stability. Price stability. Price stability. But he didn't talk much about maximum employment. So does Kevin Walsh even care about jobs. Oh, the humanity.

1:23Today on the show, we talk about how the dual mandate is tricky for the Fed to fulfill. And we parse some early clues about how Kevin Warsh might be tackling this part of the mission.

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2:19Maybe you go for some free-range self-directed investing, or pick up a few farm-fresh trades while you peruse. You can even get help from a dedicated advisor. That's full-service wealth management. No matter your goals or appetite for investing, Schwab has everything you need all in one place to invest your way. Visit schwab.com to learn more. Let's take a whirlwind tour of central bank mandates around the globe. We will start in Frankfurt with the European Central Bank. Their mandate is to maintain price stability. Then on to the Bank of Japan. Price stability. The Swiss National Bank. Price stability.

2:59Bank of England. Financial and price stability. Then we have the Reserve Bank of Australia. It talks about both price stability and full employment, which mirrors the Federal Reserve in the U.S. But this two-goal structure is relatively rare among central banks. And the Federal Reserve's current mission is kind of recent. It wasn't until the late 70s that Congress changed the Fed's mandate to be about price stability and maximum employment. This update came out of a pivotal time in American history, the civil rights movement. One leader who pushed for this legislation was Coretta Scott King, the widow of Martin Luther King Jr.

3:36The King Center website has a video from the 1970s, and in it, Coretta Scott King speaks about full employment as part of a larger set of policies. It has to do with health care, housing, education, transportation, crime, energy, all of the problems that we face in our central cities and in our rural areas too. Economists like Claudia Somm have their own way of describing this concept. Claudia used to work at the Federal Reserve, and she knows all about the labor market because she actually has a recession indicator tied to unemployment named after her. It's called the SOM rule. Maximum employment, broadly speaking, is the idea that everyone who wants a job has a job.

4:21It's like the sweet spot for the economy. People are working, the ones who want to be working. They have good job opportunities. But it doesn't have a number attached to it. Maximum employment can't really be measured, and this goal poses a couple of different complications for the Fed. Complication number one, these two goals of maximum employment and price stability can be in tension with one another. If we push too hard, we might end up with a bunch of inflation. And then that would hurt exactly those same workers that we're trying to get across the finish line. Here's why pushing on jobs can affect inflation.

4:59So the Fed has one main tool at its disposal, interest rates. Lowering rates makes it cheaper for people and businesses to borrow money and then demand for stuff goes up. Well, if there's demand out there, if consumers are out buying and businesses are investing, well, they're going to need workers to make it happen. And so then that can kind of indirectly lead to more employment. But what if there aren't enough workers to fill those jobs at current wages or there aren't enough workers trained in a particular skill? So then all of a sudden you can point a lot of demand into the economy, have labor shortages and end up causing inflation and a lot of stress on businesses.

5:40And it's not like the Federal Reserve has this very, you know, fine dial they can turn and optimize for different parts of the economy. The Fed's tool with interest rates, very blunt instrument. And this bluntness of the instrument is the second complication for the Fed when it comes to promoting maximum employment. Raising or lowering interest rates can only do so much for a system as complex as the American labor market. The labor market has had big structural inequities, discrimination, differences across workers, whether it's race, ethnicity, education. I mean, there's a lot of unequalness in the labor.

6:22And that's been baked in for decades and decades. For example, the unemployment rate for Black workers has historically been higher than the overall rate. Jobless rates can also vary quite a bit by state. The Fed can't use interest rates to boost a specific group of workers. So that's a pretty big constraint on its ability to promote maximum employment. Getting every worker across the finish line, that's tough. That is not something that we have accomplished at any point in the U.S. history. And the Federal Reserve, again, cannot get us there on its own. There's a danger of giving the Fed too many goals with too few tools and also a danger of this idea that the Fed can just do it all because it can't.

7:02In 2020, the Fed updated its language around its strategy. The bank described maximum employment as a, quote, broad-based and inclusive goal. New Fed chair Kevin Walsh has expressed skepticism around this phrasing. Last year, he gave a speech where he questioned whether the new language was, quote, simply a political nod. That speech was before Walsh was formally nominated for Fed chair. Last month, during his first press conference, Walsh critiqued how some of his predecessors tackled the dual mandate. I don't share the view that was expressed a few generations ago, that Federal Reserve chairmen show up at a podium like this and say, you got to choose.

7:44And you're going to have to decide whether you're willing to tolerate higher inflation to put more people at work. I don't believe in that. Wors said he believed low prices and strong employment could be mutually compatible, but he didn't say much more about jobs. And economist Claudia Somm and other Fed Watchers clocked some important changes in the Fed's statement. For starters, the statement was shorter. It was a terse 132 words. And while the statement did mention the Fed's dual mandate, it removed an explicit reference to maximum employment. Claudia says she doesn't like these changes. I think it's important for Fed communication to be accountable for the Fed to explain itself to regular people?

8:30Like not everybody knows what the dual mandate is. It's like, come on, just spell it out. Let's be open and clear about where our mission is and what our responsibilities are. I guess the deletion of that phrase, it's like one way to read it could be, oh, he's just trying to be less wordy. But another reading of it could be he's signaling where his priorities are, right? And do you feel like it's kind of like an open question, like the intention behind that deletion? Absolutely. We're left guessing. There are these questions about, well, what would Warsh want the committee to do if the labor market did start to wobble?

9:11Like, would they come to the rescue? Would they stand firm on inflation? There's so many ways to think about and define maximum employment. We've never heard from Kevin Warsh how he thinks about it, how he defines it. That's a really important missing space. Claudia says that historically, when the two parts of the Fed's dual mandate have been in tension, the Fed will focus on the more urgent matter. And right now, inflation is the priority. This episode was produced by Angel Carreras with engineering by Travis Hagan. It was fact-checked by Sierra Juarez. Kicking Cannon is our show's editor, and The Indicator is a production of NPR.

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