By Raphael Bostic, President and CEO
In 1977, Congress gave the Federal Reserve a dual mandate to promote price stability and maximum employment.
The standard for price stability is clear: inflation. Defining maximum employment is more ambiguous, because the definition of maximum—the greatest attainable quantity—does not directly translate into a similarly clear benchmark for employment.
Let me share how I think about maximum employment in the context of the Fed's dual mandate.
In the short term, we achieve the highest attainable employment when every American who wants a job has one. This can't always be true in a dynamic economy in which hundreds of thousands of jobs are created and lost every month. Changing jobs takes time. So the unemployment rate will never be zero. But in an optimal economy, spells of joblessness should be rare and short.
That is a day-to-day definition of maximum employment. In the shorter run, labor market opportunities tend to expand or contract based on a person's education or training, the person's experience, and the availability of jobs. Those circumstances can change over time, though, so it follows that we must also define a longer-run state of maximum employment. I would offer this: longer-term maximum employment means everyone finds gainful work consistent with their full potential.
In pursuing our employment mandate in the shorter term, the Federal Open Market Committee (FOMC), the Fed's monetary policy-making body, plays a crucial role in establishing conditions to facilitate achieving longer-term maximum employment. Perhaps just as important, the Federal Reserve has obligations beyond monetary policy. These include supporting fair access to credit, monitoring conditions in low- and moderate-income communities, sharing information about how to improve conditions, and—within boundaries—assisting in community development. Those duties comprise an effort to build an economy that works for everyone—one that fulfills that longer-term concept of maximum employment.
Underlying this work is a fundamental question: who is lacking the opportunity to fully contribute to output and growth?
Real progress toward maximum employment demands that we focus on the people and communities who are the answer to that question. Dismantling barriers to their economic prospects would be a giant step toward reaching that longer-term maximum employment goal. Therefore, identifying those barriers and highlighting solutions to overcoming them are clearly in the Fed's interest.
Those barriers manifest in various ways but notably along racial, gender, and geographic lines.
Minorities and women experience a different job market than do White men. U.S. Bureau of Labor Statistics data tell us that since 1972, the average monthly unemployment rate for Black men aged 20 and older has been more than twice the rate of White men the same age.
And while women's labor market fortunes have improved, a persistent gender gap in earnings remains. Some of this discrepancy is because women are overrepresented in lower-paying occupations such as childcare, cleaning, and social services. Yet even within specific job categories, men still consistently get paid more.
Turning to the geographic dimension, the structural shift away from producing goods and toward providing services has battered rural areas and smaller cities. Over roughly the past 50 years, the share of US gross domestic product from services has risen from 60 percent to 80 percent. This transition favors heavily populated areas because the service sector is increasingly fueled by the exchange of ideas and agglomeration—crowding together smart people and companies. Consequently, rural places have experienced significantly slower employment growth and lower labor force participation than have metropolitan areas.
All the gaps I noted are too persistent and too wide to explain away as differences in individuals' motivation or innate talent. Rather, these gaps reflect differences in access to education, quality job training, jobs themselves, small-business financing, and other engines of opportunity.
The pandemic and accompanying economic disruption further clarified that disparities in income, wealth, employment, and access to opportunity constitute a structural limitation on the economic prospects of millions of Americans. That limitation constrains maximum employment and the nation's macroeconomic prospects. Therefore, broadening opportunity speaks directly to the Fed's maximum employment mandate.
We all must more forcefully pursue maximum employment, and the Fed is doing its part. A year ago, the FOMC adopted a monetary policy framework that codifies a broader conception of maximum employment. The new framework states that the FOMC will no longer preemptively raise interest rates to circumvent inflation that might result from a "hot" labor market. Without clear data demonstrating that an inflationary problem has arrived and is likely to last, we will allow labor markets to run their course, which can further our pursuit of long-run maximum employment.
Recently, of course, data have indicated rising inflation. While higher inflation may be with us longer than I thought a couple months back, long-run inflation expectations remain reasonably well anchored. Therefore, I am not convinced we are staring down a lengthy bout of troublesome, fundamental price inflation.
Rest assured, monetary policy is not the Fed's only tool to help make the economy work for everyone. We are pursuing this objective on a variety of fronts: we advise, we do research, we convene, we promote and lift up what works, and we have a regulatory function that fits into this. But let me be clear: the Fed can't do it alone. It took decades for labor market disparities to calcify in our economy. Meaningful progress will require sustained effort from many players with the expertise, resources, and ability to address the varied hurdles and move us closer to fulfilling our longer-term maximum employment goal.
September 27, 2021