Federal Reserve officials have been facing a chorus of criticism for pledging to keep interest rates at rock bottom and for buying government-backed bonds at an enormous scale even as the United States economy bounces back from the pandemic. But after a weaker-than-expected April jobs report, they may have an easier time selling the idea that patience is a virtue.
“I feel very good about our policy approach, which is outcome-based,” Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said in a Bloomberg television interview shortly after the report came out. “Let’s actually allow the labor market to recover, let’s not just forecast that it’s going to recover.”
American employers added 266,000 jobs last month, far short of the one million that economists had been expecting. Analysts agreed that the figure was a severe disappointment, but lined up on little else: Some pointed to the numbers as a sign that the economy remains in a deep hole, while others saw in it validation for the idea that expanded unemployment insurance is discouraging work, causing labor supply issues that are hurting businesses.
What is clear is that the economy is nowhere near any mainstream estimate of full employment. And how the labor market recovery will look going forward — as the economy reopens and a huge number of displaced workers must reshuffle into jobs that suit their needs and interests — is wildly uncertain.
For the Fed, that unsure backdrop could serve as a validation of their policy approach. Officials have said they want to see realized progress toward their goals of maximum employment and stable inflation that averages 2 percent over time — not just forecasts for improvement — before dialing back their $120 billion in monthly bond purchases and, eventually, thinking about raising rates.
“The remaining big gaps to goals on the employment front and lower conviction in the momentum of the recovery in employment will underscore Fed policy patience and officials’ reluctance to take a strong rebound for granted,” Krishna Guha, an economist at Evercore ISI, wrote in an analysis after the Friday data release.
The Fed’s patient outlook differs somewhat from how the central bank has run monetary policy in the past. It has historically dialed back monetary support — policies that keep credit cheap and flowing — in anticipation of economic progress. The goal was to slow the economy before it overheated.
But officials updated their policy framework after inflation failed to rise as officials expected for years on end, raising the risk that price gains would slip into an economically damaging downward spiral. Still, Fed officials have faced recent criticism for their new, less forward-looking approach. Some economists have worried that it could make them too slow to react to changes in the economy.
Fed doctrine had long been “to take away the punch bowl before the party gets out of hand,” Lawrence H. Summers, a former Treasury secretary, said at a recent webcast event. “What we’ve now said is — we’re not going to do anything until we see a bunch of drunk people staggering around.”
April’s report could make it easier for the central bank to justify the new method, since it shows how challenging it will be to forecast the speed and tenor of the recovery from the pandemic, which is likely to proceed differently than economic healing after a typical recession would.
“This is a highly uncertain environment that we’re in,” Mr. Kashkari told Bloomberg. “We have a long way to go, and let’s not prematurely declare victory.”