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Fed Must Fight Unemployment More Aggressively

Fed Must Fight Unemployment More Aggressively
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By Wednesday, 13 May 2020 12:15 PM Current | Bio | Archive

With U.S. unemployment at levels not seen since the Great Depression, economic policymakers should be plotting a path to a better place. The Federal Reserve can’t generate a fast recovery on its own, but it can and should prevent an unnecessarily slow one.

How can the Fed avoid being a drag? With one important caveat that I’ll discuss below, officials must do whatever it takes to bring down unemployment. At a minimum, this means the central bank should hold short-term and long-term interest rates at zero –- what traders call a “flat yield curve.”

With 10-year Treasuries yielding about 0.7%, the Fed still has a way to go to zero. And even that’s not necessarily enough. The central bank should be looking for ways to push interest rates into negative territory, maybe deeply. Even if the economic effect is weak, it’s worth it. This crisis calls for the deployment of all tools, even weak ones.

Now for the caveat. There’s one excuse for allowing the unemployment rate to stay high: if the Fed expects inflation to rise materially above its 2% target in the next couple years. In that case, the central bank should certainly consider tightening policy. The last thing the country needs is a repeat of 1970s-style stagflation.

But as Fed Chair Powell highlighted in his remarks on April 9, the most likely problem with inflation is that it’s going to fall even further below target. So the inflation caveat does not apply.

Some might be concerned that if the Fed were to succeed in boosting activity, we would end up with a faster spread of Covid-19. But monetary policymakers have no special expertise in epidemiology. They are unelected technocrats who must stay focused on their economic objectives, leaving public health decisions to the relevant elected officials.

Others may be wondering about the usefulness of discussing monetary policy at all. What the country really needs is better fiscal policy – that is, measures from Congress to provide financial relief to families and offset the economic shock of necessary shutdowns. And better public health policy from the White House, to get the pandemic under control. Well, yes and yes. But the lack of action from public officials shouldn’t prevent the Fed from doing its job as well as it can.

In the months and possibly years to come, the central bank will seek to deflect scrutiny of its performance in meeting its employment and inflation goals. Like many a struggling student, the Fed will want to be judged in terms of effort: “We’re making so many loans to so many companies. We’re keeping short-term interest rates lower than ever.”

That’s not good enough. The Fed has a mandate: Achieve maximum employment and stable prices. If inflation is low, there’s nothing difficult or bad about easing monetary policy to get more people back to work. The Fed should be judged only in terms of its success or failure, not applauded for making necessarily unconventional policy choices in unusual economic times.

The bottom line: If the Fed doesn’t act more aggressively at a time when unemployment is at 14.7% and inflation is expected to be below target for two or more years to come, it should be held accountable for delaying the recovery and allowing millions of Americans to suffer needlessly.

Narayana Kocherlakota is a Bloomberg Opinion columnist. He is a professor of economics at the University of Rochester and was president of the Federal Reserve Bank of Minneapolis from 2009 to 2015.

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With U.S. unemployment at levels not seen since the Great Depression, economic policymakers should be plotting a path to a better place.
fed, drag, economy, central bank, virus, pandemic, unemployment
Wednesday, 13 May 2020 12:15 PM
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