When will fed policy begin to exacerbate unemployment?

Instead of reducing unemployment, will the Federal Reserve policy soon contribute to it? By increasing inflationary pressure, the Fed’s bond-buying program could begin giving employers a reason to forestall additional hiring in an already uncertain economy. The threat from Fed policy here is a specific example of the general problem that arises from the blunt tools of government responses to the subtleties of economic issues.  

Since early in the pandemic, the Federal Reserve has been aggressively pumping liquidity into the economy to prevent an expected economic constriction. Over the last year, the Fed has roughly doubled its balance sheet, injecting $4 trillion into the markets. Even as concerns about inflation have mounted, it has not looked to reverse the flow.  

When recently asked about concluding the Federal Reserve’s $120 billion a month bond-buying program, Federal Reserve Bank of Richmond President Thomas Barkin said: “if the labor market can clear relatively quickly, then maybe it can happen sooner.” Federal Reserve Bank of New York President John Williams expressed the same hesitancy: “We want substantial further progress relative to where we were.”

Perhaps the Fed should reconsider its approach.  

Last week’s Consumer Price Index data showed prices jumping at the highest rate in 13 years — 0.9 percent in June, following a 0.6 percent May rise. “Over the last 12 months, the all items index increased 5.4 percent” — also the most significant jump in 13 years.

If inflation signs are proving stubbornly conspicuous, unemployment is proving downright ubiquitous. Despite its headline-grabbing 850,000 payroll increase, the June unemployment rate rose to 5.9 percent from May’s 5.8 percent. Moreover, the number of unemployed rose 168,000 to 9.5 million. 

Further, the labor force participation rate remains at just 61.6 percent, well below its pre-pandemic rate of 63.4 percent (February 2020). The number of those not in the labor force barely slipped from 100.275 million to 100.253 million. Unemployment would be a whopping 8.5 percent if today’s participation rate were adjusted to its pre-pandemic level.  

So, the Fed seems trapped on a treadmill: Continue adding liquidity and inflationary pressure (which is responding to Fed policy), hoping unemployment — finally — begins to reverse (which currently is not).  

The evidence of the Fed’s entrapment comes from looking closer at the unemployment figures. June’s employment report shows that the number of unemployed increased by 168,000 in May to 9.5 million. That figure almost exactly matches the latest job openings report from May, which showed 9.2 million openings.  

Effectively balanced, the labor market should be seemingly clear. Yet, it is not; instead, the number of unemployed increased slightly — even as liquidity continues pouring into the economy.

There have been several attempts to explain this incongruity. Workers and openings could be mismatched by location or occupation. Of course, a mismatch of such proportions seems unlikely.

One of the two prevailing arguments asserts that federally enhanced unemployment benefits are making work less attractive to the unemployed. In response, 26 states have opted to terminate these enhancements prematurely. The other argues that a child care shortage prevents workers from leaving home and returning to work.

In all these cases, it is hard to see how additional Fed liquidity infusions resolve the circumstances. Contrastingly, it is becoming clearer how they could begin to exacerbate them.

There isn’t unemployment because there are too few job openings. Nor are there job openings because there are too few potential workers. If federal unemployment enhancements or child care unavailability are the culprits, additional liquidity will not address these. At best, it would only give the temporary illusion of greater prosperity, thereby duping employers to increase wages beyond their profitability further or to induce child care providers to open more facilities than real economic circumstances demand.

The cost of such an illusion will be the reality of increased inflation, which will only set the overall economy back, not move it toward greater recovery. America already faces economic uncertainty. The economy has undoubtedly changed during the pandemic — the one that is still emerging will be from the one that entered it.  

The Fed’s continued liquidity infusions only add more uncertainty to this uncertain economy. As inflationary evidence continues to mount, how long will it be before employers begin to hedge against it by curtailing investment in additional equipment and employees until they get a clearer perspective of the new economy and where it is going?  

Ultimately the Fed’s predicament is a microcosm of the government’s blunt ability to address an economy’s subtleties. In the case of the Fed, it can simply adjust liquidity; in the case of today’s unemployment, it can be the result of a host of factors. Despite the best of intentions, the government can risk the worst of outcomes. Sometimes what the best government, and in this case the Fed, can do is stop doing what it is doing. 

J.T. Young served under President George W. Bush as the director of communications in the Office of Management and Budget and as deputy assistant secretary in legislative affairs for tax and budget at the Treasury Department. He served as a congressional staffer from 1987 through 2000.