Susan M. Collins, Speech: Parsing the Pandemic’s Effects on Labor Markets
Inflation and Fed Funds
“By raising rates, we are aiming to slow the economy and bring labor demand into better balance with supply. The intent is not a significant downturn. But restoring price stability remains the current imperative and it is clear that there is more work to do. I expect this will require additional increases in the federal funds rate, followed by a period of holding rates at a sufficiently restrictive level for some time. The latest data have not reduced my sense of what sufficiently restrictive may mean, nor my resolve.”
How the Pandemic Changed Economic Relationships
“However, other indicators are now quite different than they were pre-pandemic. A challenge for current monetary policy is determining whether the changes in the relationship between the unemployment rate and other labor market variables stem from temporary effects of the pandemic, or from longer-lasting labor market trends that the pandemic might have influenced.”
“In particular, both price and wage inflation are now much higher than before the pandemic, even though the unemployment rate is back to pre-pandemic levels.”
“One explanation for a higher inflation rate coinciding with the pre-pandemic unemployment rate has to do with the tradeoff between unemployment and inflation as captured by the Phillips Curve. More specifically, the Phillips Curve may be steeper at unemployment rates near 3.5 percent.”
“A key question for monetary policy is whether relationships at this low unemployment rate are symmetric. If true, this would raise the likelihood of a similarly rapid decline in inflation associated with modest increases in unemployment, as tight monetary policy eases demand pressures. But we cannot rule out other explanations that would point to a less favorable tradeoff between inflation and unemployment, such as an increase in inflation expectations relevant for wage and price setting.”
“The pandemic has also highlighted challenges in measuring labor market slack. Vacancies relative to the unemployment rate, as captured by the so-called Beveridge Curve, are now at historically high levels. One reason could be that firms are struggling to replace workers who move from job to job to obtain higher wages. Alternatively, the recent increase in vacancies could signal a longer-lasting increase in frictional unemployment, and therefore in the natural rate of unemployment.”
“These alternative explanations for the recent observed vacancy-to unemployment relationship matter for monetary policy, and how we think about labor market slack. If the substantial increase in vacancies mostly reflects temporary factors, then a slowdown in labor demand could work primarily through lower vacancies, rather than higher unemployment. This scenario for the Beveridge Curve would be consistent with a steeper Phillips Curve at low unemployment rates – the possibility I just mentioned.”