Fed Policy Shift Raises Eyebrows
The Federal Reserve’s decision to shift toward a more “inclusive” employment policy following the Black Lives Matter movement may have contributed to its delayed response to inflation, according to several top economists.
Traditionally, the Fed balanced concerns about both high and low unemployment, adjusting interest rates to prevent inflation from spiraling. But in 2020, after the death of George Floyd, the central bank pivoted sharply, prioritizing a “broad-based and inclusive” approach to employment. This shift meant the Fed moved away from raising rates when unemployment was unusually low, a measure previously used to keep inflation in check.
“It was no longer good enough to hit employment targets in the aggregate. Rather, targets had to be hit on an ‘inclusive’ basis that included all groups,” said Kenin Spivak, CEO and chairman of SMI Group.
“The Fed failed to raise interest rates when it should have done so, leading to the sustained inflation experienced during the Biden administration, and from which we are still slowly recovering,” he added.
Economists Cry Foul
As the central bank gears up for its first policy review since 2020, economists are warning that its “inclusive” employment strategy may have played a role in the inflation surge that reached a 40-year high under Biden, according to a Bloomberg report.
Since 2012, the Fed’s rate-setting committee has issued an annual statement outlining its long-term goals. In August 2020, as unemployment soared above 10% and inflation remained below the Fed’s 2% target, policymakers conducted their first major review. Against the backdrop of nationwide protests over Floyd’s death, they formally adopted the “broad-based and inclusive” employment objective, committing to addressing only “shortfalls” in employment—meaning high unemployment—rather than responding to low jobless rates.
This approach, some economists argue, led the Fed to hold off on raising interest rates in 2021, even as inflation began climbing. In a recent paper, UC Berkeley economists Christina Romer, who chaired Barack Obama’s Council of Economic Advisers, and David Romer, highlighted how the Fed’s new interpretation of “maximum employment” slowed its response to inflation.
“The narrative record suggests that the reinterpretation of the maximum employment goal played a crucial role in slowing the Federal Reserve’s response to rising inflation,” they wrote in the paper, published in September by a Washington think tank.
Another analysis, authored last year by Michael Kiley, deputy director of the Fed’s financial stability division, suggested that the policy shift may have backfired.
Focusing only on employment shortfalls “exacerbates economic volatility, worsens employment shortfalls, and creates excess inflationary pressures” compared to the Fed’s previous strategy, Kiley wrote.
The impact was felt as inflation peaked at 9.1% in 2022—the highest rate since 1981. In 2023, even as inflation cooled to 4.1%, the unemployment rate hit its lowest level in over 50 years. Though inflation has since declined, it remained above the Fed’s 2% target, sitting at 3% in January, Biden’s final month in office, according to the Bureau of Labor Statistics’ Consumer Price Index.
Some experts argue that by prioritizing employment, the Fed allowed inflation to eat away at American wages.
“The shift over placing an over-importance on maximizing unemployment at the cost of minimizing inflation is detrimentally hurting Americans, especially because after-tax wages just simply haven’t kept up with the cost of inflation,” said Ted Jenkin, co-founder of oXYGen Financial.
“In the end, even if you are employed, if your wages can’t match the pace of the cost of living, you have a real problem. The scales need to shift in Fed policymaking toward minimizing inflation,” he added.
Powell on the Defense
Fed Chair Jerome Powell has defended the 2020 policy change, dismissing concerns about inflation when it first started rising and famously calling it “transitory.” After the Fed’s January meeting, Powell once again justified the approach, arguing that raising rates before clear inflationary evidence emerges would be premature.
“Why would you preemptively want to put people out of work in the absence of any evidence that suggested that this was not a sustainable level?” Powell said.
Some business leaders support the Fed’s employment-first strategy, arguing that the economic challenges of recent years required careful navigation.
“This economy has been tricky to navigate, with a lot of different factors pushing prices up. The Fed had to thread a very tight needle,” said Joseph Camberato, CEO of National Business Capital. “We avoided a recession, and inflation didn’t spiral out of control.”
Ken Mahoney, CEO of Mahoney Asset Management, acknowledged that while inflation has been “a mess” since 2020, the alternative could have been worse.
“Right now, we have a very large majority of the country having a job and dealing with higher inflation,” he said. “That seems fairly attractive compared to other scenarios, like much higher unemployment with less inflation.”
As the Fed prepares for another policy review, the debate continues over whether its 2020 shift helped stabilize the economy or fueled the inflation crisis that Americans are still feeling today.
