You are saying that the Fed will, after it has reached its 2% inflation target or less, seek to increase unemployment up to 5% (which is much higher unemployment than today).
How is increasing unemployment the same as the Fed’s mandate of seeking maximum employment, particularly after it has reached its low inflation target?
I’m just not following your thought here.
Taking your words quoted above on raising unemployment at face value, to me this seems the exact opposite of maximizing employment (again, given that inflation has declined to the Fed’s target of 2%, which you assume as having occurred).
What am I missing in your idea?
Any explanation would be appreciated, thank you.
A 5% unemployment target is absurd. It may also be meaningless. That’s because a 5% unemployment number can be reached various ways:
At one extreme, moving from a 3.5% to 5% unemployment rate can happen if 1.5% of the people lose their jobs. This likely has a cause of some grave effect on the real economy, which presumably is what the fed wants.
tt the other extreme, moving from a 3.5% to 5% unemployment rate can happen if 1.5% of the people join the workforce. This likely has little [immediate] effect on the real economy other than having more people available for jobs that are posted.
In reality, it can happen with a combination of the two factors.
First objective is to get inflation under reasonable control.
Second objective is employment if employment is low (i.e. unemployment is high). If unemployment is low, then the Fed needs to do nothing–because low unemployment is not seen as a problem.
Technically yes. But 3-4 months from now, ask anyone standing in the checkout line if they think inflation is still a problem. And chances are they will say yes because they remember X costing 20-40% less even though that price was almost 2 years ago. I do the same thing when buying wood/tools/etc for my next project. It will be a long time before the new prices are seen as normal.
I called the electric company today. My budget was $443 per month. I have electric heat and New England electricity comes mostly from NG. I ended my budget and paid $257 for the month.
My new supplier will cost less than $0.11 per kwh. Eversource was $.24
Wait until this summer when NGrid’s costs are 5 cents and you’ll still be paying 11 cents. These guys don’t make money out of thin air. If you read the fine print, most alternative suppliers do not adjust with the season - you lock in. Sorry you went for that deal.
Supply chains catching up, a decrease in energy demands, and higher agricultural yields have ushered in a reduction in inflation rates. I suspect this trend will continue over the next few months, but it won’t last forever.
All this change and disruption (I’m talking electric infrastructure build-out, Ukraine War impacts, energy struggles in Germany and don’t even get me started on China) will gravely affect inflation rates.
Executive orders aren’t going to fix anything. We need sharp policy change. Without that, the low inflationary times of 22-23 will likely be the best we’ll see for a long time.
Zeihan> Covid was a mid term factor in 2020 & 2021. By the beginning of 2022 our industrial base/supply chains caught to where we are. And there were some short factors that pushed inflation down–increased gasoline supply, very warm European winter, and last summer was some of the best weather that boosted agricultural production.
Long term factors–IRA will require a massive industrial build out of everything electrical–much of it done from scratch, also demand for EVs which has not reached massive production status is inflationary, disruption in fertilizer supply from Russia which results in inflationary pricing from other regions, last year countries had some reserve fertilizer supply–that is now gone, food which have increased 30% will increase further, Europe could have a normal winter next year which means high natural gas & electrical pricing resulting in reduce industrial production there, Russian petroleum might finally impact Russia and thus the Chinese resulting in higher pricing of Chinese produced goods. Also Chinese labor costs are rising rapidly as their demographic issue bit them. All of these means the US will have to double its industrial base to replace China & Germany reduced production which will take YEARS.
Now all of the above assumes that the Russians, Americans, and Chinese do not make a military misstep.
Exceedingly low unemployment is an inflationary pressure. When unemployment gets very low, wages start increasing as employers have to compete more to get the employees they need. If wages increase, the prices employers charge for their goods and services tend to increase as well. And that can lead to a wage/price spiral - a feedback loop where higher wages (due to the very low unemployment) lead to higher prices, which leads to inflation, which leads to employees demanding - and getting because of their relative scarcity - higher wages.
So excessively low unemployment leads to inflation. Thus the Fed doesn’t want the unemployment rate to get too low. The “maximum employment” part of their mandate isn’t seeking 100% employment - it is seeking the maximum employment consistent with stable prices.
Our current unemployment rate of about 3.5% is very low by historical standards. 5% used to be considered full employment, hence my comment about getting unemployment up to 5%. I’m open to arguments that the current full employment rate - a rate that does not trigger a wage/price spiral - might be lower at the moment. And if I were making that argument, I’d dig into under-employment - people working (and hence employed) but working at lower wage jobs than they want, or working part time instead of full time.
