The Fed’s ‘Run It Hot’ recipe works for markets. Jobs? Not that much

Views of the Federal Reserve as the markets watch the interest rate take off

Photo credit: Andrew Harrer / Bloomberg

Jerome Powell likes to point out how the Federal Reserve’s policy to prolong growth helped low-income Americans get jobs and pay increases.

But after the coronavirus destroyed those gains, the Fed chairman’s zero-rate bailout fails to help the most vulnerable in the job market. Instead, you may end up widening inequalities.

New research by Fed economists shows how badly pandemic-era job losses skewed against the poor, who got fired at four times the rate of those who earn more. Women and minorities were especially affected, according to data from the Department of Labor.

Long way back

Quarterly U.S. unemployment rate

Source: Bureau of Labor Statistics / Forecasts compiled by Bloomberg

“The pandemic exposed how fragile the job market was,” said Valerie Grant, senior fund manager for AllianceBernstein’s US equity portfolios. While the Federal Reserve’s approach to addressing labor inequalities is “laudable,” she said, “I don’t know if it will bring about real change. There are limits to what only monetary policy can do.”

Buck stops

Powell himself is making that point with increasing urgency as inequalities increase.

While the labor force faces a long routine to regain its pre-crisis position, capital markets have returned strongly, largely thanks to the multi-A trillion dollar bailout that the Fed helped orchestrate.

At the end of May, employment among a fifth of the lowest-paid Americans was still about 30% lower than February levels, according to a document released by Fed economists this month. At that point, U.S. stocks – whose ownership The biases towards the wealthy and the whites … had recouped most of their losses and had fallen approximately 10% from the year’s highs.

Two tracks

Annual change in:

Source: Bloomberg, Atlanta Fed GDPNow series

Powell and his colleagues strongly deny that their policies are exacerbating inequality. They say they will do everything in their power to get the United States back to the 2019 hot jobs market, including keeping interest rates close to zero for the foreseeable future.

Read more: Powell says Fed policies “absolutely” don’t add to inequality

But the Fed chief bluntly tells the officials in charge of US government spending that in the fight to avoid a depression, the money largely stops with them.

On Tuesday, Powell will testify jointly with Treasury Secretary Steven Mnuchin in Congress, where lawmakers are debating whether to add to the $ 3 trillion pandemic stimulus they approved, or start marking it again.

‘Long way back’

Throughout the world, governments are turning to fiscal policy to lift their economies from the worst depression of generations, amid a growing consensus that monetary policy, the central tool of economic management for several decades, is is running out of way.

In the United States, “for the least qualified and educated, it will be a long, long way back,” said Mark Zandi, chief economist at Moody’s Analytics. “The Federal Reserve can only take us part of the way.”

Full employment recovery will likely require policies such as a broader provision of childcare and training for children, and investments to create infrastructure jobs, Zandi said. “It will take a lot of support from the federal, state and local governments to get us back, even with the Fed’s foot on the gas.”