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How Is the Fed Thinking About Unemployment?

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Our economics reporter gives a rundown on the real unemployment rate, stimulus checks and inflation.
As he guides the financial system through the coronavirus pandemic, Jerome Powell, the chair of the Federal Reserve, has worked to keep cash flowing through the economy. He’s done it by tamping down interest rates and sometimes speaking up — to a degree that’s rare for a Fed director — to urge legislative action on behalf of workers and businesses. Powell testified today before the Senate Banking Committee, and tomorrow he’ll speak to the House Financial Services Committee. What he said this morning mostly reaffirmed his past positions: He committed to holding interest rates low until unemployment was up and inflation rose, and he said that a recent increase in bond yields — though it has spooked some investors — was in fact a demonstration of fiscal health. To get a handle on what Powell’s testimony means, and how it fits into the bigger picture of Fed policy these days, I spoke to Jeanna Smialek, an economics reporter who covers the Fed and who listened in on the Senate hearing today. Hi Jeanna. In his Senate testimony today, Powell said that the economic recovery still had a long way to go, and that the Fed would continue to keep interest rates at rock bottom. What else did we learn from him today? Powell put a fine point on just how patient the Fed is going to be before dialing back economic support. For example, Senator Kyrsten Sinema, an Arizona Democrat, asked if the Fed needed to achieve all three of the goals it has set out — full employment,2 percent inflation and an outlook for above-2 percent inflation — before raising interest rates. He answered that with an unambiguous “yes.” That’s consistent with what the Fed has said in statements, but it was noteworthy that he did not feel the need to add any caveats. Likewise, he reiterated that the Fed needed to see “substantial further progress” toward full employment and stable inflation before dialing back its massive bond buying. Investors have been getting nervous that a bond buying slowdown, or a “taper” in wonk terms, could start soon. They lapped up that reassurance. (The hearing was closely watched. JPOW, Powell’s internet nickname, even trended on Twitter for a while.) Unemployment has fallen to about 6 percent, down from a record-high 14.7 percent last spring. But Powell and Janet Yellen, the Treasury secretary, have both recently cited a different figure — roughly 10 percent — as the actual jobless rate right now. Can you explain the discrepancy? And tell us, is it rare for the country’s top economic and fiscal officials to cite unofficial unemployment data like that? In some small way, does this represent a new kind of thinking in Washington? The Fed and Treasury are taking the official unemployment rate and adding people who (a) have dropped out of the labor market since February 2020 or (b) are misclassified because of a pandemic-tied reporting quirk. This is the latest evolution in a long-running shift toward looking at labor market weakness more holistically: Officials have recognized for years that the official unemployment rate, which counts only active job applicants, misses a lot of people.

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