Fed's Inclusive Jobs Recovery: A Double-Edged Sword?

The Federal Reserve's (Fed) pursuit of an inclusive jobs recovery has been a central focus of its monetary policy in recent years. While this approach has contributed to a broad-based economic recovery, some economists and policymakers are questioning whether it has also fueled inflationary pressures. This article explores the relationship between the Fed's focus on inclusivity, wage growth, and inflation dynamics.



The Fed's Focus on Inclusivity

The Fed has been committed to reducing unemployment as broadly as possible, including among disadvantaged groups. This focus on inclusivity has helped to ensure that the benefits of the strong pre-pandemic economy were widespread, with wages moving up, especially for lower-income workers, and racial disparities in unemployment narrowing (Source: Federal Reserve Chair Jerome Powell's remarks, October 2020).

Wage Growth and Inflation Dynamics

The Fed's focus on an inclusive jobs recovery has influenced wage growth and inflation dynamics in several ways:

1. Uneven wage growth and sectoral imbalances: The Fed has been attentive to the uneven nature of the recovery, with certain sectors and groups experiencing substantial hardship. This has led to increased dispersion in sectoral wage growth. For instance, the Atlanta Wage Growth Tracker (AWT) shows that wage growth for low-wage workers has been slower than for high-wage workers, contributing to income inequality (Source: "The increase in price inflation following the Covid pandemic has brought renewed attention to wage growth as a potentially important driver of price inflation").
2. Compositional shifts in the labor force: The pandemic recession led to a disproportionately large share of low-wage workers losing their jobs, which raised average wages. This is evident in the rise of average hourly earnings growth despite a significant drop in labor demand. However, this compositional shift does not necessarily reflect underlying wage inflation that aligns with the business cycle (Source: "At the onset of the pandemic average hourly earnings growth—a widely cited wage growth metric—rose rather than fell, despite a significant drop in labor demand").
3. The role of targeted fiscal support: The Fed has emphasized the need for further targeted fiscal support alongside accommodative monetary policy to achieve a broad-based and inclusive recovery. This is because monetary policy alone may not be enough to address the disparities in the labor market and ensure that the benefits of the recovery are widespread (Source: "The U.S. economy saw a strong initial bounceback from the depths of the COVID-19 (coronavirus disease 2019) crisis, aided by significant targeted support. The recovery remains highly uncertain and highly uneven—with certain sectors and groups experiencing substantial hardship. These disparities risk holding back the recovery").

Potential Inflationary Pressures

While the Fed's focus on inclusivity has contributed to a broad-based recovery, it has also raised concerns about potential inflationary pressures. Mass deportations of undocumented workers could shrink the labor supply, causing employers to bid up wages and contributing to inflation. Higher tariffs on imports could also add to inflationary pressures by increasing costs for consumers. The rebuilding efforts following the wildfires in California are likely to fuel higher prices for things like lumber, leading to higher rents and home prices in the short term (Source: "Overall consumer price inflation in the U.S. has come down sharply since peaking at near double digits in mid-2022, stoked by the pandemic, but in recent months has hovered near 3%. The Fed wants to get that down to 2%.").

Conclusion

The Fed's focus on an inclusive jobs recovery has influenced wage growth and inflation dynamics by addressing the uneven nature of the recovery, ensuring that the benefits of the recovery are widespread, and contributing to a more stable inflation environment. However, targeted fiscal policies, alongside accommodative monetary policy, have also posed potential inflationary pressures. As the economy continues to evolve, policymakers must monitor these dynamics closely to maintain a balanced and inclusive recovery while managing inflationary pressures.

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