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HomeMarketThe Fed lumps inflation and jobs together. Many economists think that's wrong

The Fed lumps inflation and jobs together. Many economists think that’s wrong

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In the Federal Reserve’s playbook, inflation and the job market are joined at the hip — constantly moving in relationship to each other.

In this economic cycle, more and more economists think the relationship has broken down and are worried that the Fed doesn’t seem to think so.

“I think the Fed needs to be a lot more circumspect about how we think about the relationship between job growth and what it means for inflationary pressure,” said Betsy Stevenson, an economics professor at the University of Michigan.

The nagging worry that the Fed’s playbook wasn’t written for a pandemic has become a real concern now that the government reported the economy added a net 517,000 in January – more than double forecasts.

See: Did the jobs report really show 517,000 new jobs? Maybe not, but the U.S. labor market is still red-hot.

Economists worry the strong job growth will lead the Fed to keep raising its benchmark rate to 6% or higher, so high that it will cause a recession and job loss.

In an interview on Bloomberg, Stevenson said that job growth in this cycle did not cause inflation and job losses won’t help.

She argues that the spike in inflation was caused by too much demand coming out of the pandemic that couldn’t be filled by companies struggling to manage the coronavirus epidemic and supply chains. In other words, demand recovered before supply.

For instance, the leisure and hospitality sector is still unable to find enough workers to meet the demand for people going out to dinner.

“It is not going to help us meet demand for people going out to eat if we fire more cooks and fire more waitresses,” she said. Instead, governments need to make it easier for businesses to serve people.

The idea that this recovery didn’t have much to do with the job market has been gaining adherents over the past several months.

Former Nobel-prize winning economist Peter Diamond first argued last September that the Fed shouldn’t try to curb high inflation by slowing down the labor market.

Diamond argued that dynamics in the labor market were outside the scope of the Fed’s tools.

Read: Insights from an hour-long conversation with MIT Professor Peter Diamond


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