US monetary policy goes inclusive

Over the past 10 years, fostering inclusive growth has moved higher up the agenda of governments, international institutions and, increasingly, companies. Under Chairman Powell, it has become a key topic for the Federal Reserve through the focus on the heterogeneity of the labour market situation of different socio-economic groups. It has led to the view that pre-emptive tightening based on a declining unemployment rate is unwarranted. On the contrary, it may very well stop people from finding a job. It will be interesting to see whether other central banks and in particular the ECB in the context of its strategy review, will follow in the Fed’s footsteps.

Inclusive growth can be defined as “growth that is both sustainable and broad-based in terms of employment opportunities”1 . Over the past 10 years, fostering inclusive growth has moved higher up the agenda of governments, international institutions and, increasingly, companies Under Chairman Powell, it has become a key point of attention of the Federal Reserve. Powell’s introduction to the press conference following the latest FOMC meeting perfectly illustrates the focus on the heterogeneity of individual situations: “The economic downturn has not fallen equally on all Americans, and those least able to shoulder the burden have been hardest hit. In particular, the high level of joblessness has been especially severe for lower-wage workers in the services sector, for women, and for African Americans and Hispanics.”2 This focus was also an integral part of the Fed’s strategy review.

To this end, between February and October 2019, a large number of ‘Fed listens’ meetings have been organised throughout the United States allowing a cross-section of American society to express views on the economy, inflation, monetary policy, etc 3 . The insights are fascinating to say the least and reveal the gap between theoretical concepts like the Phillips curve or the natural rate of unemployment and the reality on the ground. Participants wondered why the labour market was characterised as ‘hot’ while in their own communities unemployment remained structurally high.

Business representatives explained they had developed training programmes to cope with recruitment difficulties in a tight labour market. Interestingly, raising wages was not considered as a means of attracting and retaining workers. Rather, the emphasis was put on training programmes, health care, or other benefits. Another striking observation was the fact that inflation was less discussed than the labour market. Against this background, the change in the longer-term strategy of the FOMC is all the more understandable. “A robust job market can be sustained without causing an outbreak of inflation”4 . To put it technically, when the Phillips curve is flat, a decline in the unemployment rate is insufficient a reason to tighten monetary policy because this decline does not convey information about the future development of inflation. The central bank can afford to wait before tightening policy. In the old days, when the Phillips curve was upward sloping, rate hikes were pre-emptive. Alan Greenspan’s preferred metaphor was that of bringing an oil tanker to port, a manoeuvre which needs to start well before seeing the harbour. Now, monetary policy can be reactive with central bankers waiting to see a sufficient pick-up in inflation before getting into action.

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