Powell’s Econ 101: Jobs, Not Inflation. And forget about the money supply

WASHINGTON (Reuters) – In a Congressional hearing dominated by discussions about the pandemic and what might be needed to cure the economy from its effects, Fed Chairman Jerome Powell sent a subtle message on Tuesday to US senators weighing their options.

FILE PHOTO: Federal Reserve Chairman Jerome Powell (left) and former Treasury Secretary Steven Mnuchin prepare to speak at a House Financial Services Committee hearing on “Oversight of the Treasury Department and Federal Reserve Pandemic Response ”at the Rayburn House office building in Washington, USA, December 2, 2020. Jim Lo Scalzo / Pool via REUTERS

Throw away textbooks, because the world has changed.

Unemployment rate? Forget. The Fed only cares about how many people work and how to increase it, not some secular statistic which, despite its familiarity, overlooks a key group, namely those who stopped looking for work during the pandemic and must be brought back.

Inflation? Not a problem anytime soon. Asked by United States Democratic Senator Mark Warner about the need to make “a significant investment” in American infrastructure, Powell dismissed classic concerns of large government borrowing driving up prices and replied “this is not a problem. problem for this time as close as I can understand. “

The money supply? No longer relevant, Powell, 68, told Republican U.S. Senator John Kennedy, 69, the once-important measures of cash and easily-spent assets that were the focus of the Fed’s attention. in the past.

“When you and I studied economics a million years ago, M2 and monetary aggregates seemed to be related to economic growth,” said Powell, referring to a primary measure of money between hands of the public. “At the moment … M2 … doesn’t really have any major implications. It’s something we have to unlearn, I guess.

There’s been a lot of unlearning these days at the Fed and the economics academy, on everything from basic economic relationships to the risks – or not – of mountainous public debt. Even before the pandemic, the central bank was reassessing one of its core ideas – that when the unemployment rate was low, inflation would be high, and vice versa.

The idea led former central bankers to worry whenever the unemployment rate fell below a certain point and start itching for rate hikes that would slow the economy and push inflation back. future. It also made people unemployed.

This concept was pretty much thrown overboard in August: Whatever the driver of inflation, the Fed concluded – and there is a lot of disagreement over what it is – low unemployment n ‘is no longer part of it.

The unemployment rate itself may even have passed. It measures the number of active people divided by the number of active people or people looking for a job. What does not matter, however, are those excluded from the labor market – retirees, for example, but also, and more worryingly, women who gave up their careers to take care of their families during the period. pandemic.

When the Fed considers its maximum employment target these days, Powell said, “We don’t just talk about the unemployment rate, we mean the employment rate,” measured against the population as a whole and aspirant. to “high levels of participation”.

Report by Howard Schneider in Washington; Editing by Dan Burns and Matthew Lewis

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