The current dual mandate of the Federal Reserve (Fed) to promote maximum employment and price stability was first established by Congress in 1977, 64 years after framers of the Federal Reserve Act created a central bank to oversee monetary policy in the U.S. The new mandate undoubtedly resulted from the economic struggles faced during the late 1970s; an era of high inflation and high unemployment. As a sign of the times, a new economic measure called the “Misery Index” (the sum of the unemployment rate and inflation rate) came into prominence.
Entering 2020, the Misery Index was anything but miserable as the longest-running U.S. economic expansion appeared ready to keep breaking records. The unemployment rate in the U.S. hovered at 4% or lower for nearly two years and inflation was stable, consistently coming in below the Fed’s 2% target. However, the economic outlook changed almost instantaneously in early March when the full force of the coronavirus hit the U.S.
After economic activity in the U.S. and across the globe was brought to a near standstill to contain the pandemic, the Fed under Jerome Powell’s leadership has communicated a clear and consistent message to Americans: “We are committed to using our full range of tools to support the economy and to help assure that the recovery from this difficult period will be as robust as possible.” The speed and depth of the Fed’s response has helped to cushion the economic damage, but the pandemic’s impact on long-term economic growth remains a question mark.
Labor market conditions in the U.S. have suffered devastating effects from the economic shutdown, with a disproportionate impact on lower-income households. Fed policymakers are increasingly focused on restoring labor market conditions to pre-pandemic tight levels as the best way to support low- and moderate-income communities.
Federal Reserve Bank of Philadelphia President Patrick Harker’s recent statement suggesting inflation would “ideally be overshooting a bit” on its 2% target before requiring a policy response appears to reflect a growing consensus inside the Fed that inflation is unlikely to be a problem anytime soon. The Fed’s dual-mandate goal of price stability is likely to take a backseat for policymakers until the unemployment rate falls substantially from current levels.
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This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
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