On labor and employment

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Adam Posen: Now let’s talk about the goals of policy. Congress has given the Fed dual goals. One thing, in the new framework of inflation targeting strategy, Powell, you and other members of the committee, chairman of the mentioned in his speech also, arguably are approved – in judging from the Angle of the Labour market economy from overheating, the fed may have made a mistake in the past, that is not positive enough to achieve employment.
But on the other hand, there is now a lot of concern that the Fed is behind the curve. Some say you focus too much on social goals. So, how do you consider the labor force employment target and employment level measurement and other issues? I know the Commission deliberately did not set specific numerical targets, but could you talk a little bit more about how you set indirect targets to determine whether the labor market was overheating?

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John Williams: This is a very complex and challenging question. Unlike the 2 per cent long-term inflation target, which we choose based on our own analysis and our own perceptions, the question you raise really depends on market forces and demographics and a host of other factors that conspire to influence the maximum level of employment.

I think our new policy framework does highlight several relevant aspects. The first is employment. Many, many macroeconomists, including myself, tend to think about the natural rate of unemployment and have studied many models of unemployment. We tend to focus on unemployment, including releasing unemployment projections in our forecasts. But we’ve learned a few things in the past, particularly during the last recovery and expansion, that a common feature of the business cycle is that the employment cycle is not the same as the unemployment cycle, and labor participation has its own cyclical behavior.

I think what I’m taking away from this is that we need to look at a lot of labor market indicators, not just the unemployment rate, but the actual actual employment, not just the maximum employment.

You might ask, how do we know that? The answer is that it takes a lot of analysis and research into economic, demographic, wage and price dynamics. In my view, we have observed the regular cyclical characteristics of employment related to population ratio, labor force participation, and we need to see how these factors evolve.

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And the other thing I wanted to mention is that we used the term ‘shortfall’ belonging to the new frame, and we’re really trying to maximize employment and of course 2% inflation, which falls to line with our price stability target.

In the past, under the influence of the natural rate of unemployment, people didn’t want the economy to run too hot or too cold, and that did sometimes lead to policy being too cautious and not wanting the economy to overheat. I think the concept of “gap” is to show us the average inflation rate remained at 2%, in the long term we are committed to achieve this goal, but at the same time, we also want to see the Labour market is as strong as possible, if there is a job, we will be trying to avoid, so, this is a comprehensive and includes the definition of multi-dimensional. We look at a lot of indicators of the Labour market, not just the ones that get the attention, like youth unemployment, but really make sure we get the full picture of the Labour market.

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In terms of what employment maximization actually looks like, I think we made good progress in that regard during the last expansion cycle: unemployment was below 4 percent, and labor force participation rose to quite high levels. The US Labour market can be very strong even when inflation is close to target. That’s what I’m looking at when I’m trying to determine maximum employment.

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