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ls the Federal Reserve doing too little?

The Federal Reserve Building in Washington, D.C.

Kai Ryssdal: The Federal Reserve has two main jobs. The dual mandate, it's called. Keep prices stable -- that is, inflation. And keep employment high. On that first point, they're doing pretty well. There's not a whole lot of inflation in the American economy right now.

Jobs are a different story. In the New York Times today, David Leonhardt writes about the Fed and the hows and whys of the choices it's making between inflation and jobs. David, good to have you back.

David Leonhardt: Thank you, Kai.

Ryssdal: So with inflation stable and low in this economy, you'd think more people at the Fed would be worried about that employment number, but you point out in the paper this morning -- that's not the case.

Leonhardt: No, that's not the case. And you would particularly think that they would be focused on employment because they just made this mistake a year ago. They thought the recovery had taken hold and we were going to have steady declines in unemployment and so they stopped their efforts to reduce long-term interest rates. And then they were proven wrong. And the recovery basically stalled out last year. And we can't be sure that it's going to stall out now, we certainly are hoping that it's not going to, but there are definitely reasons to worry now. And the Fed still doesn't seem worried about unemployment.

Ryssdal: Why? There are a lot of smart people working in that building.

Leonhardt: There are a lot of smart people working in that building and I'm quite confident some of them are worried about unemployment. But I think there are a few things going on. There are some institutional biases at the Fed that cause them to focus on inflation. First there's the fact that once inflation takes hold, it really is difficult to nip in the bud. I think some of them still remember very much the 1970s. If you think about how old people tend to be when they get in these positions, some of them were growing up then professionally, right? And so it's their formative experience. There's also this issue that inflation hurts investors much more than unemployment tends to. So the Fed tends to spend more time talking to investors than it does talking to advocates for the unemployed.

Ryssdal: And I'm obliged to point out here that as we've seen the past 2 to 3 years, your argument that once inflation takes hold, it sticks around for a while. Once high unemployment takes hold, as we've seen, it's sticking around for a while.

Leonhardt: That's a really important point. I mean, even if employment growth picks up rapidly, even if Friday's jobs report is great, we are years away from returning to anything that would be like full employment. And so I think we are going to look back on this period as having high unemployment for easily 5 years, possibly closer to 10. And the lack of alarm about that is worrisome.

Ryssdal: Let me play the opposite side of the coin then, David, and point out that households in this country -- even when you take out gas and energy prices -- they are feeling a little bit of a pinch. Inflation is bubbling up out there and people are rightly feeling squeezed.

Leonhardt: That's absolutely right. This is a more complicated call than the Fed's call was, say, last June. Inflation is increasing a little bit. The reason to be somewhat hopeful that it's not going to keep increasing is that recent history -- now we're talking decades, not months -- is that spikes in food and oil prices don't tend to feed into overall price spikes unless you have this wage-price spiral in which employees are demanding higher raises. It's really hard to see how workers today have the bargaining power, given the weakness of the economy, to demand higher raises in reaction to the price increases. And so it seems more likely that inflation is going to moderate. And then I would also add that we have to weigh relative risks here. Is there some risk that inflation is going to increase in coming months? Absolutely. But it seems to me really difficult to make the case that the risk is higher than the risk that our recovery is going to stall out -- particularly when a lot of the people at the Fed making the prediction that inflation is going to be a big problem, have now been making that prediction for a few years and been wrong again and again.

Ryssdal: David Leonhardt. He writes the "Economic Scene" column for The New York Times. David, good to talk to you.

Leonhardt: Thank you, Kai.

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Maybe what the FED remembers about the 1970's, which Kai and David do not, is *that the Phillips Curve does not work*.

Whether the FED is "worried" about unemployment, there isn't much they can do about it.

Can you name more than two significant economic variables from 1970-2000 that have remained constant, and will continue to do so in today's world. Doubtful. It's like trying to forecast the electric/fossil fuel era born after 1910 with data from 1890.

David Leonhardt states: The reason inflation may not "...keep increasing is that recent history -- now we're talking decades, not months -- is that spikes in food and oil prices don't tend to feed into overall price spikes unless you have this wage-price spiral in which employees are demanding higher raises."

I think some of them still remember very much the 1970s. "...old people...some of them were growing up then professionally..." Wow. In 1975, I was just out of college and in my first job. Now I'm 58, and I guess I'm officially "old." Thanks for that bit of education!

Yes, the Federal Reserve has a dual mandate, minimizing both unemployment and inflation. But while your stories consistently assume that "inflation" here means *price* inflation, from my high school civics and economics classes and my knowledge of the period of its founding, the Federal Reserve is instead supposed to be preventing *monetary* inflation, keeping the *value of the currency* stable. And recent Fed actions---"quantitative easing," for instance---have severely inflated the money supply. If there's nothing they can do that will *guarantee* dramatic improvements in unemployment (and if there were they would have done it years ago), the Fed should start doing its one job it can actually do, and bring monetary inflation back under control.

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