Does Asymmetric Monetary Policy Exacerbate Asymmetric Outcomes? Eric J. Gordon, Creative Investment Research,
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| Eric Gordon, left and Luke Newton, Right, at the Hutchins Center on Fiscal & Monetary Policy at Brookings, June 14, 2024. |
As the Federal Reserve prepares for its five-year public review of the monetary policy framework, ongoing debates persist among experts regarding the most effective strategies to achieve economic stability and growth without exacerbating inequality. The Hutchins Center on Fiscal & Monetary Policy at Brookings recently convened a conference enabling economists to articulate and discuss their recommendations for the Fed's review, including a dialogue on the merits of adopting a symmetric, balanced approach versus an asymmetric, shortfalls-focused one amid rapidly evolving economic conditions. Each strategy carries different implications across the country's financial landscape, yet their impact on minority communities is particularly crucial, serving as a barometer of broader economic health and welfare. This post aims to analyze the competing approaches, comparing their goals and methodologies, and to provide insights into their anticipated effects on minorities and minority communities.
Michael Kiley, Deputy Director of the Federal Reserve's Financial Stability Program, opened the conference with a presentation arguing for economic policies that emphasize symmetry to best alleviate labor market activity shortfalls. This means maintaining a balanced approach to deviations from the target in either direction, or treating the costs of high inflation and high unemployment equally. In 2020, the Fed updated its framework from aiming to mitigate "deviations of employment" in place since 2012, to focusing on "shortfalls of employment," signaling a departure from a symmetric approach (FOMC, 2020).
In preparation for the 2025 review, Kiley warns that the asymmetric shift seen in recent years can actually "exacerbate shortfalls and create inflationary pressures" (2024). Michael Bauer, Senior Research Advisor at the Federal Reserve Bank of San Francisco, contends that prioritizing employment can enhance social welfare, and that empirical evidence indicates inflation bias is an overstated concern. He claims that the "focus on shortfalls directly follows from [the Fed's] maximum employment mandate." (Bauer, 2024).
How do these vying perspectives fare in the context of potential minority community impact? The research by Feiveson et al in "Distributional Considerations for Monetary Policy Strategy" concluded that even marginal decreases in overall unemployment rates spark "more meaningful reductions for specific and particularly vulnerable subgroups of the population" (2020). Similarly, Aaronson et al's research indicates that when the labor market is robust, further improvements yield "a modest extra benefit to some disadvantaged groups, relative to earlier in the labor market cycle" (2019). These findings suggest that a shortfall loss function could positively impact minorities more than a symmetric one, and that running the market hot could catalyze job growth and heighten economic wellbeing in minority communities. Bauer's comments at the conference echo this sentiment: referring to research conducted by his colleagues at the San Francisco Federal Reserve, he asserted that "you can actually reduce inequality a little bit with a hot labor market because lower income groups benefit more from a strong expansion" (2024).
Overemphasizing employment, however, can mean not seeing the forest for the trees. Asymmetric policy can overcorrect for shortfalls and take employment beyond its maximum sustainable level for stable inflation. Kiley's research centers around stability and predictability in monetary policy, driving his trepidation about policy frameworks that only react strongly to negative deviations from the natural unemployment rate. The drawbacks of positive deviations, namely potential inflation bias and volatility, can have an outsized negative impact on minorities and minority business development, just as the positive effects of a strong labor market are felt most within these communities. Most people can have jobs but still be unable to afford their bills or maintain their savings, for instance. Bauer, alternatively, suggests there is less of a relationship between inflation and the labor market than the Phillips curve would suggest. He adds that the Fed reaching its effective lower bound (ELB), or the point at which nominal interest rates cannot be lowered further without sacrificing the functioning of conventional monetary policy tools, "causes downward inflation bias… so some upward bias could be a welcome antidote" (Bauer, 2024; Kiley & Roberts, 2017).
The key takeaway is that there is no perfect monetary policy capable of stimulating all of the good and none of the bad, and this extends to disproportionate impacts on short- and long-term minority economic development. The conference demonstrated that while debates over policy framework abound, there is maintained consensus on the need to consider monetary policy's positive and negative effects on inequality. Kiley, Bauer, and others provided their recommendations for the Fed's review of its framework and, in doing so, stimulated necessary conversations surrounding the optimal strategy to grow the economy sustainably and improve economic outcomes across the country's financial spectrum. More tailored research could focus on the following questions: (1) Can a symmetric approach potentially hamper the job market to the extent that it reduces the disproportionate gains afforded to minority communities by relatively unrestrained labor market expansion? (2) Inversely, can an asymmetric approach drive inflation and volatility to the point that inflationary pressures and recession woes cloud high growth optimism? As the Fed moves forward, incorporating diverse perspectives will be vital in crafting policies that reduce asymmetries between majority and minority communities, leading to stable, equitable economic development. The role of asymmetric monetary policy in achieving this goal remains a point of contention.
References:
Aaronson, S. 2019. “Okun Revisited: Who Benefits Most from a Strong Economy?” Brookings Papers on Economic Activity.
“An agenda for the Federal Reserve’s review of its monetary policy framework”. 2024. Brookings Office of Communications.
Bauer, M. 2024. “Discussion of “Monetary policy, employment shortfalls, and the natural rate hypothesis””. Brookings Institution.
FOMC. 2020. “Review of Monetary Policy Strategy, Tools, and Communications”. Board of Governors of the Federal Reserve System.
Kiley, M. 2024. “Monetary Policy, Employment Shortfalls, and the Natural Rate Hypothesis”. Finance and Economics Discussion Series, Federal Reserve Board, Washington, D.C.
Kiley, M. 2024. “Monetary Policy Strategies to Foster Price Stability and a Strong Labor Market”. Finance and Economics Discussion Series, Federal Reserve Board, Washington, D.C.
Kiley, M. 2024. “Presentation based on "Monetary Policy, Employment Shortfalls, and the Natural Rate Hypothesis” and “Monetary Policy Strategies to Foster Price Stability and a Strong Labor Market””. Brookings Institution.
Kiley, M., Roberts, J. 2017. “Monetary Policy in a Low Interest Rate World”. Finance and Economics Discussion Series, Federal Reserve Board, Washington, D.C.
Eric J. Gordon, Creative Investment Research, 2024