How Jerome Powell Shifted The Fed's Economic Thinking : Planet Money : The Indicator from Planet Money Federal Reserve Chair Jerome Powell has radically changed the Fed's approach to supporting the economy. Today for our Indicator Of The Week we explain "Jeromonomics".

Jeromonomics: Indicator Of The Week

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SYLVIE DOUGLIS, BYLINE: NPR.

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SALLY HERSHIPS, HOST:

This is THE INDICATOR FROM PLANET MONEY. I am Sally Herships, in for Stacey Vanek Smith.

DARIAN WOODS, BYLINE: And I'm Darian Woods.

HERSHIPS: And Darian, it's Indicators of the Week.

WOODS: And for this week's indicator, we want to celebrate the Jackson Hole Symposium that went on this week. This is like Coachella for central bankers.

HERSHIPS: I am waving my calculator in the air.

WOODS: They gather there in their cut-off jeans and their ties and talk about monetary policy.

HERSHIPS: Casual khakis.

WOODS: The most casual you've ever seen central bankers. This year, of course, it's online. And because it is Coachella for central bankers, we have brought along our own headliner.

MIKE KONCZAL: Hey, this is Mike.

WOODS: This is Mike Konczal. He's a director of macroeconomic analysis at the Roosevelt Institute, which is a progressive think tank - not exactly Daft Punk, but maybe the closest thing in economics.

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WOODS: And given that there was this pretty important speech this morning by Fed Chair Jay Powell at the conference, we brought in Mike to explain just what Jay Powell's approach to economics has been. So today's show - an indicator of how Jay Powell is leading the Federal Reserve and the U.S. economy.

HERSHIPS: Fed Chair Jay Powell gave a hugely anticipated speech this morning about the economy.

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JEROME POWELL: Strong policy support has fueled a vigorous but uneven recovery.

HERSHIPS: Basically, the economy is in a weird place during the pandemic, but it's heading in the right direction. And the Fed will keep supporting the recovery for some time.

WOODS: So we really wanted to know how exactly Jay Powell has shifted economic thinking at the Fed. And I was thinking, we need a kind of catchy name for that kind of thinking. What would you call it? Is it Jeromonomics (ph), Jayonomics (ph)...

KONCZAL: (Laughter).

WOODS: ...The New Powell Doctrine?

KONCZAL: I am terrible at trying to name things, so I'm probably the last person you want to ask about that.

WOODS: So it sounds like we're going to need to get a marketing agency involved to come on board to name this.

KONCZAL: Yes, definitely. That would be a good investment for Jay Powell.

HERSHIPS: And as this is Indicators of the Week, we asked Mike Konczal from the Roosevelt Institute what he thought.

WOODS: If there was, like, a single indicator, like, a single number that represented Jay Powell's approach to economics, what do you think it would be?

KONCZAL: In the past, we'd just look at one number, like the measured unemployment rate, and say, aha, that's the economy. Where I think Powell has actually brought in a lot of other indicators.

WOODS: I like your answer, which is kind of wishing-for-more-wishes type of answer, which is...

KONCZAL: (Laughter).

WOODS: ...His number is that he's not looking at a single number. But if you were to kind of say one thing that represents his broader look, what would that one be?

KONCZAL: I think the Black-white unemployment gap.

HERSHIPS: The Black-white unemployment gap - that is how much higher the unemployment rate is for Black people than it is for white people.

WOODS: That number, by the way, is our Indicator of the Week - 70%. The Black unemployment rate is 70% higher than the white unemployment rate - almost double.

HERSHIPS: Ouch. That seems tremendously high.

WOODS: It is. Although, it's actually less high than it has been historically. Mike says that Jay Powell wants this gap closed and looks at this figure perhaps more than past Fed officials did, who might have just looked at the overall unemployment number when thinking about jobs. And this is a real live debate about whether targeting metrics like these politicized the Fed.

HERSHIPS: And given all this new thinking, we wanted to know exactly how Jay Powell is thinking differently. What is Jeromonomics? And Mike breaks it into four ways Jay Powell is breaking away from the past.

KONCZAL: So the first is that we can have much tighter labor markets than what has counted in full employment in recent decades. In general, economists have thought that unemployment couldn't get below 4.5% or, you know, maybe 4%. And, you know, even at 3.5%, Powell said, you know, this doesn't feel like full employment. We don't have significant wage takeoff that we'd be worried about. We're seeing people who are outside the traditional labor force - perhaps they're disabled or they've given up looking for work - being brought into the labor market. And employers are seeking them out. So not just that the number could go lower, but who counts as unemployed could be expanded out. And the actual size of the labor force could be determined by more aggressive policy.

WOODS: All right, so that's No. 1. We can have much tighter labor markets than previously thought. What's No. 2?

KONCZAL: The risks of a weak recovery are greater than that of overheating. There's a real worry that if the Fed undershoots a recovery, it's not just that it happens to be a little bit lower than it could be otherwise or that, you know, it'll catch itself up later. It's that if the Fed is under target, if unemployment is higher than expected for a longer period of time, that has real persistent effects. People drop out of the labor force. Investments that could have been made in human capital and physical capital and infrastructure by businesses and by the private sector wouldn't happen. It wouldn't get made up later, like a lot of economists sort of think.

WOODS: So that's got a break from maybe conventional thinking, which was that, you know, if anything, you want to prevent overheating and prices getting out of control.

KONCZAL: Yeah, absolutely. The real fear is on overheating. And as such, you know, I think a big analogy during the Great Recession was, like, trying to hit a bull's-eye. And if you're looking at a dartboard or an archery target and you only see the impacts below the target, you know you're not actually aiming at the target. You're aiming below it. And that's what you would see with inflation and in unemployment, essentially, is that, you know, unemployment was always above the target.

WOODS: All right, No. 3.

KONCZAL: The third major innovation was fighting the pandemic and doing a real across-the-board, everything-and-the-kitchen-sink approach to ensuring that the floor of the economy didn't give in 2020 as everything went into lockdown and that we were in a good position to have big job growth this year - so advocating as forcefully as a Federal Reserve chair can do for additional spending for things like aid and support, especially to unemployed workers throughout last year. In addition, he was willing to use a lot of tools to directly support municipalities, states and businesses. He was able to ensure that they all had access to credit and to cheaper credit. So I think, you know, without those actions, our recovery this year would have been much weaker.

WOODS: Right. So adding a lot of tools to the Fed toolkit. And what's the final shift in thinking that Jay Powell has really led?

KONCZAL: The final one is the big controversy for this year. It's for allowing for periods of higher-than-expected inflation to ensure that we have a robust economic recoveries. Normally, the Federal Reserve wants to have 2% inflation. That's its target. And there's always been a worry - and it's a worry that I think became much more relevant with the weak recovery from the Great Recession - was that that 2% was not really a target, at which point you could maybe go over or under it, but more of a ceiling - that it was like a speed limit that you couldn't go over. And in effect, like a speed limit, not allowing for periods where a slightly faster recovery would entail a little bit above average inflation - maybe even a kind of catch-up inflation following a recession, the same way you might speed up a little bit to get back to the estimated time of arrival on a trip.

WOODS: Got it. Are these radical ideas?

KONCZAL: I think they're radical ideas for a really conservative institution, which is the Federal Reserve. And I think Powell pushed it in a more dovish way and in a way that is more generous and better for everyday working people.

WOODS: How much credit should Jay Powell's predecessors like Janet Yellen and Ben Bernanke get for this new thinking?

KONCZAL: It's a complicated question. I think the historians will have to figure that one out. What I'd emphasize, though, is that this is not just a battle of, like, who has the best idea or who can write down the coolest equation. It's really about building credibility and institutionalizing these changes and bringing people on board. And there - I really do think Powell has brought a special element to it that another particularly smart, particularly good person may not have.

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HERSHIPS: Of course, this approach is not without its critics, like from people who want a more hawkish Fed chair or think that the Fed should just focus on inflation. But that is Jeromonomics according to Mike Konczal - four ways Jay Powell shaped the Fed's actions in new ways.

WOODS: This episode of THE INDICATOR was produced by Brittany Cronin with help from James Willetts (ph). It was fact-checked by Kaitlyn Nicholas (ph) and Michael He. And today is Michael He's last day as intern at THE INDICATOR. And we will miss you so much. All the best for your next adventure. Kate Concannon edits the show. THE INDICATOR is a production of NPR.

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