Thursday, May 19 2022

Last December, with COVID-19 vaccinations just beginning and the pandemic still raging, the U.S. Federal Reserve pledged it would continue to support the recovery with $ 120 billion in monthly purchases of bonds until there has been “further substantial progress” in meeting its targets of 2% inflation and maximum employment.

At the end of its November policy meeting on Wednesday, the central bank is expected to declare that the standard has been met, paving the way for a $ 120 billion cut in monthly bond purchases and possibly an increase in interest rates. .

How substantial has the progress been?

In the case of inflation, probably more than the Fed expected. The annual rate of price increase was 1.3%, as measured by the Fed’s preferred personal consumption expenditure price index, at the time the “substantial further progress” benchmark was set. It has been over 4% since May.

The job market is rather mixed.

For example, employment has been slower to rebound than the overall level of economic output. Gross domestic product is now higher than it was before the pandemic, while jobs remain more than 3% below that level.

In a sense, this is a promising development because it means higher productivity of workers – fewer people producing an increased amount of goods and services.

But it also reflects a potential scar as people who want to work aren’t hired or, given the Fed’s new commitment to an inclusive recovery, as job growth isn’t hired. is not widely shared.

This is where the story gets complicated, and makes a Fed’s statement of further substantial progress a matter of judgment.

When the Fed set the benchmark, the economy was short of around 10 million jobs from where it was in February 2020, before the first wave of pandemic layoffs. About half of these jobs have been recovered.

While 5 million jobs are missing is a lot, Fed officials believe the record number of openings in the economy means the shortfall is more related to workers becoming more demanding of jobs. positions that they will accept, a problem that Fed policy can’t really solve, rather than insufficient demand for labor, a problem it might face. Cutting down on bond buying is how the Fed says demand – for goods, services, and workers – is strong enough now without this extra help.

But it’s also a narrower view of the job market than the one the Fed seemed to take last year when it started labeling maximum employment as a “broad and inclusive goal.”

A range of metrics – black unemployment rate, female labor force participation rate, share of the overall population working – remain significantly worse than before the pandemic.

Broadly speaking, progress may have been substantial over the past year. The Fed is now turning to the debate on how much progress is needed to meet its targets, especially on jobs, and the possibilities while keeping inflation under control.


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