MARY LOUISE KELLY, HOST:
The Federal Reserve cares a lot about inflation and about jobs. That is because Congress gave the Fed what's known as a dual mandate. But President Trump's new Fed chair, Kevin Warsh, is talking less about employment. The Indicator's Wailin Wong and Darian Woods explain why jobs and inflation are tricky to balance, and what the new Fed chair could be signaling.
WAILIN WONG, BYLINE: The Federal Reserve's current mission is kind of recent. It wasn't until the late '70s that Congress changed the Fed's mandate to be about price stability and maximum employment. Economists like Claudia Sahm have their own way of describing this concept. Claudia used to work at the Federal Reserve.
CLAUDIA SAHM: Maximum employment, broadly speaking, is the idea that everyone who wants a job has a job. It's like the sweet spot for the economy.
DARIAN WOODS, BYLINE: Maximum employment can't really be measured, and this goal poses a couple of different complications for the Fed. So the Fed has one main tool at its disposal - interest rates. Lowering rates makes it cheaper for people and businesses to borrow money and then demand for stuff goes up.
SAHM: If consumers are out buying and businesses are investing, well, they're going to need workers to make it happen. And so then that can kind of indirectly lead to more employment.
WONG: But what if there aren't enough workers to fill those jobs at current wages?
SAHM: Then all of a sudden, you can point a lot of demand into the economy, have labor shortages and end up causing inflation and a lot of stress on businesses. It's - again, it's a pretty blunt instrument.
WOODS: And this bluntness of the instrument is the second complication for the Fed when it comes to promoting maximum employment. Raising or lowering interest rates can only do so much for a system as complex as the American labor market.
SAHM: The labor market has had big structural inequities, discrimination, differences across workers. There's a lot of unequalness.
WONG: The Fed can't use interest rates to boost a specific group of workers, so that's a pretty big constraint on its ability to promote maximum employment.
WOODS: In 2020, the Fed updated its language around its strategy. The bank described maximum employment as a, quote, "broad based and inclusive goal."
WONG: New Fed Chair Kevin Warsh has expressed skepticism around this phrasing.
WOODS: Last month, during his first press conference, Warsh critiqued how some of his predecessors tackled the dual mandate.
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KEVIN WARSH: I don't share the view that was expressed a few generations ago that you're going to have to decide whether you're willing to tolerate higher inflation to put more people at work.
WONG: Warsh said he believed low prices and strong employment could be mutually compatible, but he didn't say much more about jobs. And economist Claudia Sahm and other Fed watchers clocked some important changes in the Fed's statement.
WOODS: For starters, the statement was shorter. And while the statement did mention the Fed's dual mandate, it removed an explicit reference to maximum employment. Claudia says she doesn't like these changes.
SAHM: There are these questions about, well, what would Warsh want the committee to do if the labor market did start to wobble? Would they come to the rescue? Would they stand firm on inflation? There's so many ways to think about and define maximum employment. We've never heard from Kevin Warsh how he thinks about it.
WOODS: Claudia says that historically, when the two parts of the Fed's dual mandate have been in tension, the Fed will focus on the more urgent matter. And right now, inflation is the priority. Darian Woods.
WONG: Wailin Wong, NPR News.
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