MNI INTERVIEW: Fed Hikes Won't Wait for Social Equality -Meyer

Federal Reserve officials will likely be satisfied with reaching traditional goals of full employment and stable prices in order to lift interest rates by mid-2023 and won't take too many risks seeking a more inclusive job market recovery amid overheating fears, former Fed Governor Larry Meyer said in an interview.

Despite reframing its goal of maximum employment last year as one that includes a narrowing of economic and racial inequalities, the Fed continues to operate on a classic "non-accelerating rate of unemployment" or Nairu framework, though that equilibrium rate has likely risen in the past year, said Meyer, who served on the Fed's board of governors until 2002 and now runs an economic consultancy in Washington DC.

"Maximum employment in the context of a condition for liftoff is the highest level of employment that doesn't threaten the price stability objective. It's just Nairu in different words," he said. "The set of broad labor market indicators are there to make clear how important it is that the committee gets the highest level of employment possible without threatening the price stability mandate."

That Fed Chair Jay Powell has focused on re-attaining the pre-pandemic level of unemployment of 3.5%, a 50-year low that failed to spark faster inflation, "suggests he believes that the Nairu is 3.5% or lower," Meyer said, adding that the pandemic likely has shifted that rate higher.

BEHIND THE CURVE

Employees who can no longer return to their old jobs must look for new work or change careers, while accelerated automation during the pandemic is making some positions obsolete, Meyer said. These "frictional and structural" factors will likely push Nairu half a percentage point higher at least through the end of 2022, he said.

Meanwhile, the unemployment rate will have fallen to 3.8% by the end of 2022, with headline inflation above target at 2.1%, according to the FOMC's latest forecasts, which pins the natural unemployment rate at 4%. "That means persistent inflation ahead, unless monetary policy responds in a timely way," he said. But with rates still projected to be at the zero lower bound until liftoff in 2023, "they have a long way to go for monetary policy to be appropriately positioned to the economy."

"Never have they waited that late, and this is the flaw in the new policy framework: no preemptive increase in rates until inflation is 2% for a year," Meyer said. "By the time they get to liftoff, they could well be behind the curve."

SOCIAL CONSCIENCE

The FOMC a year ago said its employment goal is now a "broad-based and inclusive" one, reflecting an appreciation for the benefits of a strong labor market for many in low- and moderate-income communities. In the Covid recovery, top officials have spotlighted the importance of a rebound in labor participation for women as well as stuttering gains for black and Hispanic unemployment.

"The Fed is talking about racial disparities and income equality like they really have a social conscience, and they may well have, but it has nothing to do with monetary policy," Meyer said.

"Do they have to see a narrowing of racial disparities in order to justify that maximum employment has been reached and it's time for liftoff? Of course not."