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Patrick Hill: Can The Fed Achieve Full Employment Without Inflation?

By Patrick Hill | September 9, 2021

The Fed’s new framework was designed for a world of deficient aggregate demand where supply was not an issue. Coming out of the pandemic, we live in a world of ample demand where the main problem is on the supply side.”

Mohamed El-Erian, Chief Economic Adviser, Allianz SE

The Fed’s challenge is whether it can achieve a vague, full employment goal without surging inflation.  A year ago, at the Jackson Hole virtual conference, Fed Chair Jerome Powell outlined a new strategic monetary framework.  The framework outlined a new full employment goal that was broad-based, including employment of Blacks, Hispanics, and other groups. The new strategy called ‘flexible average inflation targeting’ makes a 180 degree turn toward allowing inflation rather than containing it via increased interest rates and monetary tools. Full employment becomes the top priority over inflation. The Fed policy position is that if inflation ran a bit hot over 2% to achieve employment goals, that would be all right. 

Powell Optimistic on Full Employment Goal

Nick Timiraos, in an August 29th Wall Street Journal article on this year’s Jackson Hole conference, notes that Fed Chair Powell is optimistic that the Fed can achieve a maximum employment goal. Powell said in his speech, “Favorable hiring conditions, as seen in record levels of job openings and job quitting, suggest job seekers should help the economy cover the considerable remaining ground to reach maximum employment.” The Fed in the past has defined maximum employment as an unemployment rate consistent with stable inflation.

Recently, Powell has said he would like to see the unemployment rate drop to the pre-pandemic level of 3.5%.  The August Non-Farm Payroll report showed an unemployment rate of 5.2%, mainly due to a decline in job seekers. There was a steep decline in the number of workers that want a job from 6.5M to 5.7M.  Also, the report indicated weak employment growth with only 235k new jobs. Thus, the Fed may maintain liquidity injections and hold off interest rate hikes longer. But, the agency risks allowing inflation to surge above a ten-year high where it is today.

The Federal Reserve faces significant headwinds toward achieving full employment, including declining consumer sentiment, puzzling lack of employment growth, and surging inflation. Let’s examine each of these factors to determine the Fed’s probability of achieving its maximum employment goal.

Declining Consumer Sentiment

Recent consumer sentiment indicators show a decline in sentiment due to future income concerns, job issues, Delta variant infection increases, and inflation. The following charts indicate consumer sentiment in the key $100k high-income segment has declined for the last five weeks as they lose confidence in personal finances in part due to job posting declines. Corporate executives who were optimistic during the spring recovery are now pulling back on job postings.

The high-income segment drives most consumer spending, which comprises 70% of GDP. 

Employment inflation, Patrick Hill: Can The Fed Achieve Full Employment Without Inflation?

Sources: Langer Research, Track the Recovery, Burning Glass (updated weekly), The Daily Feather – 8/20/21

Also, workers are concerned about their future income as well. As they consider income in the 1-to-2-year period, there is a significant decline in expectations for income.  Concerns about lack of job prospects are likely driving their weakening confidence in future income. The following chart from Morgan Stanley and the University of Michigan indicates a continuing decline in income expectations.

Employment inflation, Patrick Hill: Can The Fed Achieve Full Employment Without Inflation?

Sources: Morgan Stanley, University of Michigan, The Daily Shot – 8/20/21

Employment inflation, Patrick Hill: Can The Fed Achieve Full Employment Without Inflation?

Inflation Worries Drive Consumer Sentiment Lower

Inflation worries, as well drive consumer sentiment lower, which will trigger reduced spending. This most recent University of Michigan survey underlines growing consumer worries about increasing inflation in the next year.  Today, consumers experience high prices from vehicles, food, housing, rental cars, and airline tickets.  But they are also concerned about persistent inflation over the next 5 to 10 years. Consumer expectations for continuing inflation will drive their behavior to buy immediately to avoid future higher prices or stop buying if they are worried about future income.  High-income households are likely to continue spending. In contrast, the 80% with limited wealth are likely to pause buying until they are more confident of job prospects.

Employment inflation, Patrick Hill: Can The Fed Achieve Full Employment Without Inflation?

Sources: University of Michigan, The Daily Shot – 8/16/21

Consumer spending is the lynchpin of a growing U.S. economy. As consumer sentiment dives due to concerns on inflation, job prospects, personal finances, and income, economic activity will slow.  A stalling economy will support the Federal Reserve’s position that interest rates need to be low to achieve full employment.  Yet, the character of work is changing rapidly and defying economic models and analyst forecasts.

The Employment Puzzle – Millions of Job Openings Yet Unemployment Is High

On a macro basis, there were 10.1M job openings in July, yet unemployment stayed stubbornly high, with 8.7M estimated to be unemployed.

Employment inflation, Patrick Hill: Can The Fed Achieve Full Employment Without Inflation?

Sources: Bureau of Labor Statistics, The St. Louis Federal Reserve – 8/16/21

The employment puzzle is directly related to a new paradigm emerging about the character of work in America.  The one-hundred-year event of the pandemic has caused a massive shift of workers to new jobs. Job churn from February 2020 to this past summer has jumped to 37%, with 26% of this number changing employers. For instance, a recent Bankrate study showed that 55% of American workers expected to change jobs in the next year! In addition, there is a shift in the balance of power between managers and employees by introducing the power of the internet as the base work environment – not the office.  Indeed, reports that a new ‘city’ has emerged on their job opening platform called ‘WFH’ with over 100k jobs listed and growing fast.  Many firms list WFH as a benefit as they recruit talent from other firms that stay with ‘office only’ requirements.

The WFH Shift Challenges Small Business Hiring

Due to this shift to the internet, owners face hiring challenges in the restaurant industry, hard hit by pandemic lockdowns.  As an example, a barista interviewed by Bloomberg in Memphis tells how he quit his job and took a job as a customer service representative, which was completely WFH. Another benefit to the WFH environment is workers are taking on two jobs to increase their income, as reported by the Wall Street Journal in an August article on new work styles. 

Other workers take advantage of their day by interviewing via video or Zoom calls providing more potential job options than in the past office-bound situation. Workers not finding jobs to their liking are opening businesses as a ‘side hustle’ on internet exchange platforms like Pinterest, eBay, Etsy, and Amazon.  Also, as workers develop more internet skills, we expect to see more workers shift to WFH jobs.  In this chaotic work environment, high-growth companies are taking advantage of layoffs in weaker sectors.

Employment inflation, Patrick Hill: Can The Fed Achieve Full Employment Without Inflation?

eCommerce Is Transforming Employment in Low Paying Sectors

The employment market is quickly shifting as major warehouse companies and firms related to shipping grow faster than other sectors in the pandemic economy. 

Employment inflation, Patrick Hill: Can The Fed Achieve Full Employment Without Inflation?

Sources: Indeed, The Washington Post – 8/13/21

As we noted in our post, Job Churn Creates Massive Economic Uncertainty

Amazon hired 500,000 warehouse, delivery, and e-commerce support workers during the pandemic.  In addition, Amazon worked closely with Marriott, Chipotle, and other leisure and hospitality companies to employ their laid-off workers. As a result, Amazon added as many new workers as 136 other companies during the year.”

We expect to see more strong sector firms recruit from weaker low paying sectors like Leisure and Hospitality as partial lockdowns force more layoffs by small businesses, mainly in dense core cities like San Francisco and New York. The Delta virus seemed to have caused consumers to reduce their patronage in restaurants and bars nationwide.  In August, the Leisure and Hospitality sector’s seven-month growth trend ended with the loss of 41k jobs.

Retires Leaving the Workforce – Young Workers Not Returning

The pandemic caused a shock in the labor force, with millions of workers leaving the labor force. Marianne Wanamaker, Professor at the University of Tennessee, summarizes the unemployment situation this way, “People left the labor market in droves during the pandemic, and they’re not coming back, noting that the country’s labor force participation rate has been stagnant at 61 percent. “We are way behind the predicted employment recovery.” Confirming her observation, the Dallas Federal Reserve reports that over 1.5M seniors have decided to leave the labor force since last year’s pandemic lockdowns.  Senior workers are continuing to leave the workforce. In July, a Kansas City Federal Reserve worker survey showed that 28% of those workers leaving manufacturers left work for retirement.

Another significant group not returning to the labor force is young male workers.  Twenty percent of young men 25 – 34 years old living with their parents as their participation level in the labor force dropped to 85%, only bouncing up to 87% last month. Some are choosing to go to school or have concerns about becoming infected by the coronavirus.

Employment inflation, Patrick Hill: Can The Fed Achieve Full Employment Without Inflation?

Sources: Bureau of Labor Statistics, The Daily Shot – 8/20/21

Employment inflation, Patrick Hill: Can The Fed Achieve Full Employment Without Inflation?

How Many Unemployed Workers Will Return to The Workforce?

People went onto unemployment rolls to survive as the lockdowns forced businesses to lay off workers.  The key question now is: how many claimants will return to the workforce? A recent academic analysis shows that only 12.5% of workers are not accepting job offers due to staying on unemployment benefits.  Reports from 21 states ending extended unemployment benefits showed mixed results.  About half of the state reports indicated increases in employment, and the others showed little or no employment increases.

In his daily blog of August 31st, Lance Roberts, Chief Strategist at Real Investment Advisors, noted the most recent Chicago PMI report indicates that unemployed workers are not immediately returning to jobs.  The report posed an interesting question to managers, and here is their answer: With enhanced Unemployment Insurance benefits set to expire in September, are you forecasting an increase in your staffing levels?” The answer: “The majority said they were not.” 

Unemployed worker surveys over the past few months found these reasons for workers not returning to the job market:

  • Lack of childcare – even with schools opening in major cities, 50% of pre and after school childcare centers have closed
  • Delta Virus Infection – virus hospitalizations have risen to levels last seen in February of this year
  • Job Benefits vs. Quality of Life – workers with long commutes or low income are hesitating to take new jobs until they sort out what kind of job, work environment, or location they want to live in
  • Continue as Caregiver – in states like Texas, Alabama, Louisiana, Georgia, Tennessee, and Florida where the Delta variant rages, forcing prospective workers to be caregivers

Small Businesses Challenged by Lack of Commuters

Unemployment in commuter impacted cities will likely stay high as small businesses struggle with a lack of commuters. In particular, Kastle Systems, a building security firm, reports an average occupancy rate in the top ten metro areas of just 32.1% in August. In February 2020, the national occupancy rate was 99.5%.  Similarly, in cities like San Francisco, the occupancy rate is 19.6% and New York 22.9%.   A CNBC survey of human resource executives of firms with 10,000 employees or more showed 60% of company return office plans were impacted by the Delta variant infection rate. Firms as diverse as Apple, Wells Fargo, Google, World Bank, Medtronic, and the Dallas – Fort Worth Airport Authority have announced delays in back to the office requirements. The return to office delays varies from October to January 2022.

In mid – October pandemic emergency benefits will end for gig economy workers, and after Labor Day, standard state benefits will not receive federal funding. Thus, the fate of millions of unemployed workers is highly uncertain. Will most workers take jobs, or will they opt out of the labor force?

Inflation Is Surging

Inflation is coming on strong.  Over the past year, the Fed has implemented near-zero interest rates and $120B monthly injections of liquidity into the bond markets. The ultra-simulative Fed policy magnifies the impact of an unprecedented $4.5T of COVID fiscal relief packages. According to the Committee for a Responsible Federal Budget, monetary and fiscal stimulus combined totals $8.9T. It seems reasonable that the unprecedented combination of fiscal and monetary stimulus is driving inflation to 10-year highs.

The Fed watches the Personal Consumption Expenditure (PCE) inflation rate to assess the impact of its policies on inflation. The PCE is now running above at levels not seen in a decade. Core PCE, which excludes volatile energy and food prices, has soared to 3.6%, almost twice the Fed’s 2.0% inflation target.

Employment inflation, Patrick Hill: Can The Fed Achieve Full Employment Without Inflation?

Sources: Commerce Department, The St. Louis Federal Reserve, WSJ


The Consumer Price Index at 7.8% considers major increases in housing that the PCE does not.  Rent price increases have averaged 16% for July.  According to a recent Case-Schiller price report, home prices have surged by 18% on a year-over-year basis.  CPI is at the highest annualized 6-month rate since 2008.

Employment inflation, Patrick Hill: Can The Fed Achieve Full Employment Without Inflation?

Source: BofA Global Investment Strategy, Bloomberg, The Daily Feather – 8/25/21

Persistent inflation is likely to stay unchecked if both liquidity injections are in place and near-zero interest rates are maintained. Declines in consumer spending may slow inflation rates, but supply shortages will keep upward pressure on prices. Delayed shipping from Asian ports to the U.S. magnifies shortages. For example, China shut down its Shanghai port for several weeks due to a Delta virus outbreak in July. Delays and mismatched container locations have caused shipping rates from China to Los Angeles to increase ten times since February 2020.  These historic shipping cost increases are passed along to consumers by companies raising prices.

Employment inflation, Patrick Hill: Can The Fed Achieve Full Employment Without Inflation?

The Fed’s Hand Is Likely to Be Forced by Labor Force Transformation & Inflation

The agency has not defined a specific optimal employment rate for groups or the economy. The Fed has said that ‘it will balance inflation versus full employment goals.’ As Mohammed El-Erian notes in our introduction, the new Fed policy design focuses on creating demand, not solving supply issues caused by a once in a 100-year pandemic.  Pandemic-induced fear drives demand lower for some services and higher for others in an unpredictable manner. The current second wave of consumer Delta virus fear is likely to subside as the pandemic comes under control. But the pandemic has triggered persistent supply-side shortages in critical sectors in labor, goods, and services.  Monetary policy does not solve supply-side issues. In conclusion, supply-side shortages combined with a stimulative monetary policy seem to be driving a surge in inflation.

The Fed’s ultra-stimulative policy poses a significant inflation risk foreclosing the achievement of its full employment goal. The labor force transformation makes it difficult to forecast or model the ‘real’ full employment rate. Thus, the full employment goal remains elusive.

Meanwhile, consumer expectations for inflation in the real economy are rising fast.  Persistent inflation may force the Fed to slow the economy resulting in reduced hiring, as Ben Bernanke observes:

Bottom line, the critical element is inflation expectations. As long as they stay in the vicinity of 2%, the Fed’s strategy will achieve its goals. If inflation expectations were to move significantly higher, the Fed would be forced to tighten more quickly and probably slow the economy more than they would like.”

                                                                          Ben Bernanke, former Federal Reserve Chair 


Patrick Hill is the Editor of The Future Economy,, the site hosts analysis of the real economy, ideas on a new economy, indicators, labor-capitalism trends, and posts to start a dialog. He writes from the heart of Silicon Valley, leveraging 20 years of experience as an executive at firms like H.P., Genentech, Verigy, Informatica, and Okta to provide investment and economic insights. Twitter: @PatrickHill1677, email:

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