The Federal Reserve is constantly monitoring inflation and the job market, which it sees as connected.
The connection between inflation and unemployment is showing signs of failure, according to some economists.
University of Michigan economics professor Betsy Stevenson believes that the Federal Reserve should alter its stance on how job growth affects inflation.
Now that the government’s latest employment report indicates a net of more than half-a-million jobs added in January—more than double forecasts—the nagging worry among some economists is real: The Fed’s playbook may not be able to keep up with an outbreak pandemic.
There may be some questionable aspects of today’s jobs report, but what matters is that the U.S. labor market is on fire.
Economists are worried that continued strong job growth will lead the Federal Reserve to raise its benchmark interest rate—and cause a recession.
In an interview with Bloomberg, Stevenson said that job growth in this cycle did not cause inflation and the loss of jobs would have no effect on deflation.
She argues that demand for goods increased more than companies could produce, causing inflation.
For example, workers in the leisure and hospitality sector are unable to keep up with the growing demand for people going out to dinner.
“It is not going help us meet demand for people to go out and eat if we fire more cooks and fire more waitresses,” she said. “Instead, we need government policies that make it easier for businesses like ours to serve customers at all—especially in a time of rising prices.”
Over the past few months, economists have increasingly come to believe that this recovery is not tied closely to job growth.
In September of 2010, former Nobel laureate economist Peter Diamond argued that the Federal Reserve should not try to curb inflation by slowing down the labor market.
The Fed chairman argued that the labor market’s dynamics were outside the scope of monetary policy.
