U2

In the alphabet books and puzzles with which you and I were raised, "U" stood for Umbrella... or Umbrellabird, perhaps, if our parents were feeling cute and zoological. But in the alternative central banking lexicon that today's Global Elite read to their toddlers before bed ("A" is for Authority, "B" is for Benchmark, "C" is for Currency...), "U" stands for Unemployment.

It also stands in for unemployment. Just U. Always U.

That's U2, 2 U.

Or, rather: U3

Or U-Star (U* or NAIRU)

Not forgetting: U4-U6,

and, of course, U1.

Central banks are pre-programmed to care about unemployment but they don't always express themselves the way that you or I might wish. It's not always a case of: "Aaaaagh, people are losing their livelihoods. That means human suffering. Food banks. Foreclosures. Frustration-aggression behaviours. Do you even know what it's like to try and raise a family on benefits? Aaaaagh." It's more often a case of: "Hmm, if the economy turns towards fuller employment, that could be a sign of wage inflation on the horizon and maybe we should consider raising interest rates."

Well, that's central banks for you. You might think of the local Monetary Policy Committee as Dorothy's Cut-Price Posse--plenty of brains, a reasonable amount of courage but very little heart.

Am I being unfair? Perhaps.

Here's the Bank of England to tell us what its monetary policy priorities are:

Low and stable inflation is good for the UK’s economy and it is our main monetary policy aim.

We also support the Government’s other economic aims for growth and employment. Sometimes, in the short term, we need to balance our target of low inflation with supporting economic growth and jobs.

So, jobs DO matter...sometimes.

Not to mention, the Federal Reserve is a bit of a special case. It's required to play by the House (and Senate) rules, which include "you must share your toys" (sort of) AND "other people's jobs are important":

Monetary policy in the United States comprises the Federal Reserve's actions and communications to promote maximum employment, stable prices, and moderate long-term interest rates--the economic goals the Congress has instructed the Federal Reserve to pursue.

In fact, the Federal Reserve's heart got a whole lot bigger just last year. In August 2020, Jerome Powell put full employment front and centre when he set out the Fed's new FAIT approach to targeting interest rates. Here's the key passage:

The change to "shortfalls" clarifies that, going forward, employment can run at or above real-time estimates of its maximum level without causing concern, unless accompanied by signs of unwanted increases in inflation or the emergence of other risks that could impede the attainment of our goals

Back up? Sure. 🎵Let me tell you how it goes.🎵*

Full employment is when all available labour resources are being used in the most efficient way possible. Maximum employment is the highest level of employment (aka the lowest level of unemployment) that the economy can sustain while maintaining a stable inflation rate. Above-full-employment is a situation in which a highly active economy is seeing greater demand for goods and services than can be satisfied by that economy running at full employment. This situation, which is evidenced by higher-than-historical-average GDP, creates an "inflationary gap" in which workers find themselves able to demand a premium for their labour. The consequential wage increases create the expectation of price increases and drive inflation. This correlation is broadly the element of truth that characterises the Phillips Curve axiom. The opposite of above-full-employment is a situation in which labour supply has outpaced demand and there is downward pressure on wages. Employers may be able to insist on higher productivity from their employees. 🎵No time to quit now, just time to get it now.🎵**

In his speech, Powell was announcing a shift in one of the Fed's criteria for its policy decisions. It would henceforth be targeting "shortfalls" rather than "deviations" from maximum employment, meaning: the Fed would look to drive up the economy towards full employment and not get too anxious about it running hot, above full employment. In contrast, the idea behind a policy concern with "deviations" is that above-average demand for labour must be just as worrying as below-average demand. The shift means that the Fed stands ready to tolerate the inflationary pressure of a demand for labour temporarily exceeding long-run capacity. The speech has received renewed attention recently, as the annual symposium in Jackson Hole looms into view again, partly because supply-side pressures have already resulted in sectoral price inflation and partly because President Biden's expansionist agenda is likely to see significantly increased demand for labour as a side-effect of fiscal stimulus. Thus, the question whether allowing the economy to run hotter will give rise to an inflationary gap, and whether that gap can be closed before inflation gets out of hand, becomes all the more pressing.

Why did Powell announce the shift last year? Well for one thing, the Fed wanted to escape the trap of Zeno's Central Banking Paradox (ZCBP). ZCBP can roughly be formulated as follows: in targeting a hard upper bound for unemployment or inflation, a central bank can never achieve its target, since the actual unemployment or inflation figure must first reach the point at which the target is anticipated. And, since policy brakes will be applied to the rising levels at the point at which the target is first anticipated and they will be calibrated to prevent overreach, the target--which appears indistinguishable from the first point of overreach--will, in fact, never be attained. (Okay so not really a paradox but, I think you'll agree: the economies of Western democracies are adept at illustrating the observation that all motion is an illusion.) Facing up to ZCBP, say some, means the Fed needs to relax about the economy overreaching itself in order to avoid building in shortfalls from maximum employment as a matter of course.

So, feeling okay about a mildly over-active economy--or even one that's heading full-tilt towards 🎵Hot stuff 🎵***--may be the only way to achieve an economy in equilibrium. All of which brings us to the Nicomachean Ethics of Central Banking (NECB): the highest form of Monetary Policy Decision-making can only be achieved by Central Banks who do not seek perfection in Monetary Policy Decision-making but wish well to their labour force for its own sake.

And that, actually, was Jerome Powell's main point, the 💓 of his policy paper:

One of the clear messages we heard was that the strong labor market that prevailed before the pandemic was generating employment opportunities for many Americans who in the past had not found jobs readily available. A clear takeaway from these events was the importance of achieving and sustaining a strong job market, particularly for people from low- and moderate-income communities.

Powell wanted to make it clear at Jackson Hole last year that his first priority would be jobs and livelihoods.

You can think of that as his love letter to the American People.

* Songwriters: Bill Withers / Teddy Riley / Chauncey Hannibal / William Stewart / Lenise Walters. No Diggity lyrics © Universal Music - Z Tunes Llc, Notting Hill Music (uk) Ltd., City Housing Publishing, Songs Of Universal Inc., Royalty Recovery Inc

** Songwriters: Adams William / Cunningham Ruth Anne. Work Bitch lyrics © Universal Music - Z Songs, Universal Music Publishing Ab, Britney Spears Music, Bmg Sapphire Songs, I Am Composing Llc, Refune Music Ltd., Universal Music Z Songs, Kinda Silly Publishing

*** Songwriters: Pete Bellotte / Keith Forsey / Harold Faltermeyer. Hot Stuff lyrics © Wb Music Corp., Dalmatian Music, Kobalt Music Services America Inc Kmsa