The Federal Reserve has two main jobs: seek price stability in the economy; and engender conditions that lead to full employment, which it defines at something in the 5-6 percent unemployment range. The Fed has other roles, related to it position as the nation's central bank and its control over interest rates. But at its core, the Fed is supposed to keep inflation and unemployment low.
According to the latest Beige Book — national economics research that the Fed puts out eight times a year — the central bank has inflation under control but it isn't seeing unemployment decline significantly. Here's how the Beige Book summary starts out:
Reports from most of the twelve Federal Reserve Districts indicated that overall economic activity continued to expand at a modest to moderate pace in June and early July.
And here's how it winds up:
Employment levels grew at a tepid pace for most Districts since the last report....
Many Districts noted that wage pressures were minimal since the last report. Wage increases were mostly concentrated in highly skilled workers in information technology, health care, transportation, some professional services, and highly skilled manufacturing workers...
Price inflation was modest across most areas of the country.
Unemployment is still very historically high nationally, at 8.2 percent, and disastrously high regionally, with for example some parts of California seeing rates at or above 15 percent. The U.S. economy grew at a sluggish pace in the first quarter, by a mere 1.9 percent (we'd like to see 3 percent at least). The second quarter probably won't look any better and could look worse. And such low levels of growth won't enable us to make much progress in reducing unemployment nationally or in the Golden State. (And by the way, the Labor Department is scheduled to release new employment numbers for California and rest of the states tomorrow.)
However, as I've noted before, if you have the right level of education, you're basically at full employment in the U.S. The lack of wage pressure that the Fed reported is concentrated among less-educated, lower-skilled workers, the bulk of whom make up the long-term unemployed. These workers, without jobs for six months or more, may become permanently dislocated in the economy and never recover to the earning levels they were at before the financial crisis.
The Fed has kept and plans to continue keeping interest rates at zero for the future. This policy should create inflationary pressure — too much easy money chasing too few goods in an economy that isn't producing as much as it can — but the inflation isn't showing up. High unemployment and lack of rising wages is keeping prices stable. And people are getting rid of debt, so they're unwilling to borrow to consume.
This big disconnect between inflation that appears to be right on or close to the Fed's target of 2 percent and the stubbornly high unemployment rate has set off a debate about whether the Fed is living up to what Congress told it to do when the central banking system was established in 1913.
Outwardly, the Fed now appears to be supporting a recovery for affluent, well-educated workers while leaving millions of unemployed Americans to wait around for a more robust economic rebound that isn't materializing. In California this is particularly obvious, given that the Bay Area and Silicon Valley have much lower unemployment that the inland regions, which have seem two big cities with high unemployment and decimated housing markets go bankrupt in the past month: Stockton and San Bernardino.
At Bloomberg View, economists Betsey Stevenson and Justin Wolfers recently took the Fed to task for failing to execute on its dual mission:
[Some argue that] the Fed is out of ammunition, and while it might prefer to push inflation higher and unemployment lower, it can’t. Again, Bernanke has explicitly denied this, and we think he’s right. An announcement by the Fed that it’s prepared to tolerate a higher inflation rate in order to generate lower unemployment...would surely boost the willingness of companies to invest, knowing that the Fed won’t choke off the incipient recovery.
There are real costs to the Fed’s failures. Millions remain unemployed in the service of keeping inflation below its target level. We risk the possibility they may not work again as their skills atrophy and they lose hope. The Fed’s confused communications have undermined its own effectiveness and harmed its institutional prestige.
Not really holding back, are they? But the longer we see weak growth and high unemployment coupled with low inflation, you're going to be seeing the criticism of Fed policy.