How the Fed’s New ‘Inclusive’ Employment Strategy Could Be Driving Inflation, According to Economists

Some economists believe that the Federal Reserve’s new focus on inclusive employment may have contributed to rising inflation. This shift followed the Black Lives Matter movement and the death of George Floyd in 2020.

Historically, the Fed has been cautious about both high and low unemployment rates. When joblessness dips too low, they raise interest rates to prevent inflation. But in 2020, they changed their approach. Instead of mainly targeting overall employment, they began aiming for a more inclusive job market that benefits all groups.

Kenin Spivak from SMI Group pointed out that this new goal made the Fed less responsive to inflation. He argued that the central bank should have raised interest rates sooner, which could have helped control inflation during the Biden administration.

Since 2012, the Fed has released yearly documents outlining its long-term goals. The first significant review came in August 2020, amid the economic fallout from the pandemic and nationwide protests. At this time, the Fed committed to focusing on inclusive employment, stating they would mainly act to address high unemployment.

However, this shift has drawn criticism. Economists from UC Berkeley, Christina and David Romer, suggested that the Fed’s new interpretation of maximum employment delayed its response to inflation, which began rising in 2021.

Another economist, Michael Kiley, indicated that the focus on shortfalls in employment could make economic problems worse. He believes this change in policy has added to inflationary pressure and increased economic instability.

Inflation peaked at 9.1% in 2022, the highest it had been since 1981. Even in early 2023, when inflation was at 4.1%, unemployment was at a record low. Inflation has consistently stayed above the Fed’s 2% target, currently resting at 3% as of January.

Ted Jenkin, co-founder of oXYGen Financial, emphasized that the struggle isn’t just about having a job but ensuring that wages keep up with living costs. He argues that the Fed should shift its focus back to minimizing inflation.

Fed Chair Jerome Powell defended the strategy, insisting that raising interest rates prematurely could harm employment without clear evidence of inflation. He questioned the wisdom of risking job losses when the economy seemed stable.

Some, like Joseph Camberato from National Business Capital, see value in the focus on maximum employment given the complex economic environment. He asserted that the Fed has managed to avoid a recession and maintained some control over inflation.

Yet, Ken Mahoney from Mahoney Asset Management admitted that inflation has been problematic since 2020. He highlighted that having most people employed, even amid rising prices, is still better than facing high unemployment.