Unlike the ECB, the US Federal Reserve (Fed) has a “dual mandate”. It must not only achieve and maintain price stability, but also maximum employment. These two goals may be at odds with each other.
This is a column by BNR’s in-house economist, Han de Jong.
Fed Chief Powell reiterated this last week when questioned in Congress. Achieving price stability is currently a priority, as maximum employment has been reached.
“It is better to remain unemployed in a tight labor market than in a period of mass unemployment”
In doing so, Powell is saying in many words that he will tolerate a rise in unemployment, if necessary, to bring inflation to target. Annoying, of course, for those who lose their jobs, but it is better to remain unemployed in a tight job market than in a period of mass unemployment.
The question is how much increase in unemployment is acceptable to meet the inflation target. During the Fed’s last big fight against inflation, US unemployment went from about 5.5% in 1979 to almost 11% in 1982. Excruciating pain! However, this is the price to pay for overcoming high inflation.
Democrats are already running wild
Some members of Congress (particularly Democrats) are already railing against the Fed because the central bank expects a rise, albeit a small one, in unemployment. They interpret that forecast as a Fed target. Can you imagine how the criticism and pressure on the Fed will increase if unemployment actually rises substantially? Will the Fed then dare to persevere and keep interest rates high long enough to put the inflationary spirit firmly back in the bottle?
My impression is that today the willingness to suffer pain is less than in the 80s. Therefore, I believe that the social and political pressure will be enormous to deal with rising unemployment before the inflation target is reached. Powell’s performances make it seem to me that he is reciting a few short prayers every day, asking for inflation to be quietly and painlessly removed.
DNB has discovered a new tool
I am also following the statements of our central bank with growing amazement. De Nederlandsche Bank (DNB) seems to have discovered a new instrument: the call. Now, an appeal to the government not to throw money into an economy plagued by high inflation is understandable. But now DNB is spreading the calls. The last one is aimed at companies: moderate your profits. Previously, DNB has called for bigger pay rises. That didn’t fall on deaf ears. Wage growth has accelerated to a level that exceeds the range calculated by DNB. In view of the shortage on the labor market, this would have happened without a call from DNB.
“Has the DNB lost faith in the effectiveness of its policy?”
Fortunately, we live in a market economy where our economic behavior is largely driven by price incentives. The central bank has influence by influencing the price of money, the interest rate. What does it mean that DNB now deems it necessary to influence behavior by making all types of calls? Has our central bank lost faith in the market economy? Or perhaps it has lost faith in the effectiveness of its own policies?
Very bizarre
The call for companies to moderate profits is very bizarre. I would argue that the government, and especially the Dutch Consumers and Markets Authority (ACM), should ensure sufficient competition. Because then excessive price increases are punished with the loss of market shares. Is DNB saying with its strange call for profit moderation that our economy lacks competition and that ACM falls short?
In recent years we have been overwhelmed by an inflation problem. The Fed must fear finding itself under unsustainable social and political pressure if unemployment rises more than marginally. Fed boss Powell appears to be hoping for a miracle. Our own central bank makes one wonderful call after another. It’s understandable that we’ve all been a little perturbed by high inflation, but it suggests that central banks also seem pretty off track.
Source: BNR
Andrew Dwight is an author and economy journalist who writes for 24 News Globe. He has a deep understanding of financial markets and a passion for analyzing economic trends and news. With a talent for breaking down complex economic concepts into easily understandable terms, Andrew has become a respected voice in the field of economics journalism.
