CEPR: The Federal Reserve Needs to Recommit to the Full Employment Mandate

For Immediate Release: July 11, 2017
Contact: Tillie McInnis, (202) 293-5380 x117

Washington, DC July 11, 2017 — The Federal Reserve should take lessons from the Fed in the 1990s and remain committed to its full employment mandate. A new report from The Center for Economic and Policy Research and The Fed Up campaign at the Center for Popular Democracy provides a history of the full employment mandate – from the Civil Rights Movement to Alan Greenspan and the actions the Federal Reserve took in the 1990s to support growth in the economy.

The report, “The Full Employment Mandate of the Federal Reserve: Its Origins and Importance” shows how honoring the full employment mandate allowed the late 1990s economic boom and the consequential sharp redruction in the unemployment rate. In the 1990s, the Fed made the decision not to take steps to slow the economy even though the unemployment rate was already below the accepted estimates of the non-accelerating inflation rate of unemployment (NAIRU).

Today, it is critical the Federal Reserve show the same commitment to the full employment mandate that the Fed did nearly two decades ago – make decisions on interest rates based on what is actually happening in the labor market, not solely relying on theories of the labor market that may be wrong.

Alan Greenspan and the Fed’s decision in the 90s to keep interest rates low while unemployment continued to drop led to growth that disproportionately benefited those at the middle and bottom of the income ladder. This was the only time since the early 1970s when workers at the middle and bottom of the wage distribution saw sustained gains in real wages. The median real wage for Black men rose by 8.9 percent over these years, while the median wage for Black women rose by 11.2 percent. For Hispanic men the increase was 10.2 percent and 6.5 percent for Hispanic women.

The view pushed by Greenspan was that the Fed should set aside the conventionally accepted models and base its decisions on interest rates on evidence of actual inflationary pressures in the economy. This view should continue today, especially since the economy is not showing signs of inflationary pressure building and the labor market still has plenty of room to tighten.

Dean Baker, co-author of the report, stated “The country clearly reaped enormous benefits from the Fed’s decision to delay raising interest rates and allow the unemployment rate to fall below accepted measures of the NAIRU in the second half of the 1990s. It is also worth noting that the country never did pay a price in the form of any notable uptick in the inflation rate as a result of this experiment. The experience of the 1990s provides a model for what a full employment economy looks like. When labor markets tighten, workers begin to see broad-based wage gains, and persistent economic inequalities are finally reduced. By prioritizing full employment over this period, the Fed showed that consistent, strong economic growth was possible, and got about as close to achieving both sides of its dual mandate as it ever has.”
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