Underscoring the Federal Reserve’s shift in policy to flexible average inflation targeting is the idea that the best way to address inequality is through a lower unemployment rate.
While the Fed’s traditional emphasis on inflation and monetary policy is not passé, the idea that the central banks should do little else other than focus on the money supply and inflation is no longer the Fed’s sole priority.
The focus on economic inequality and how monetary policy can address it is at the core of the Economic Policy Symposium hosted by the Kansas City Fed on Friday. The symposium features the theme of “Macroeconomic Policy in an Uneven Economy.”
In the absence of fiscal policy in recent decades, the Fed had to become concerned about promoting economic growth and full employment.
Policymakers appear to moving toward a definition of full employment that may be extended to all strata of a rapidly changing and diverse American population.
Under the Fed’s new inflation targeting policy, perhaps one of the most striking ideas is that policymakers appear to be moving toward a definition of full employment that may be extended to all strata of a rapidly changing and diverse American population.
This was explicitly stated in the latest release of the Fed’s policy deliberations, with the minutes from its July meeting noting that the “unemployment rate edged higher and stood at 5.9% in June, and the unemployment rates for African-Americans and Hispanics remained well above the national average.”
In the most recent data for July, the unemployment rate among white people was 4.8%, 8.2% for African-Americans and 6.6% for Hispanics.
The gaps between unemployment rates of ethnic groups have tended to widen during tough times, and then narrow again when the economy improves. There has been a long-term improvement in those trends, but the gaps remain.
So why should the monetary authorities be concerned about what some might term a social engineering project? For the economy to grow beyond what has become a substandard long-term rate, there has to be an increase in the size of the labor force and its ability to participate, augmented by increases in productivity.
To accomplish those increases, there have to be public and private investments in long-term solutions. This requires investment in technological advances by the private sector and public investment in the education and skills that benefit all workers.
This is not a Black-white issue; rather, it’s an education and health and nutrition-security issue.
By keeping interest rates as low as possible for as long as possible, the Fed is facilitating investment and creating the foundation for advanced manufacturing. And the government, by investing in schools and health care, can create the foundation for an educated and skilled labor force.
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