Fed’s ‘hotter’ economy can boost jobs, Kaplan says

By Ann Saphir

DALLAS (Reuters) – The Federal Reserve’s approach of letting the U.S. economy run “hotter” is aimed at helping people in impoverished communities not only get jobs but also keep them, a goal that has been hard to achieve in the past, Dallas Federal Reserve Bank President Robert Kaplan said on Monday.

“You want to run maybe a little hotter, but you don’t want to go too far,” Kaplan said. But because “inflation is not running away from us,” he said, Fed policymakers “might have the luxury of trying to do more to get more people into this workforce on a sustainable basis …”

The Fed, which had been raising interest rates very slowly over the past three years as the economy has improved, last month put its rate hikes on hold because of concerns over mounting risks to growth.

Unemployment, at 4 percent, is still well below what most policymakers believe is sustainable, but inflation has only recently reached the Fed’s 2 percent target and now shows signs of sagging downward. Fed policymakers see the economy slowing because of weaker global growth, a waning stimulus from tax cuts and the impact of Fed’s recent round of rate hikes.

Speaking with reporters at the St. Philips School and Community Center after an event also attended by Fed Vice Chair Richard Clarida, Kaplan said that vulnerable groups who get jobs as an economy heats up are sometimes the first people to lose their jobs when it cools.

Kaplan and Clarida earlier went on a bus tour of Dallas that took them to a colony of new-built tiny houses, a food pantry that electronically tracks nutritional choices in coordination with healthcare workers, and blocks and blocks of empty lots and shuttered businesses.

The goal, said Kaplan, is to figure out “how do we conduct monetary policy … to create that kind of stable employment where you don’t have people in and then out.”

Kaplan’s and Clarida’s visit is part of a series of events and academic conferences this year meant to inform an ambitious review of how the Fed tries to achieve full employment and stable prices, the U.S. central bank’s two mandates.

Much of that review will be conducted with models and equations, as policymakers assess whether they should stick with the Fed’s current flexible inflation-targeting approach or tweak it to better respond to stubbornly low inflation.

On display Monday was a second prong of the Fed’s policy rethink – trying to figure out how to create conditions where more people not only get but keep their jobs.

“To do that effectively we have to move beyond the numbers and statistics,” Clarida, a former economics professor, told community leaders, philanthropists and business leaders at the event.

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