Powell’s Approach to Recovery, Inflation Will Test Union Loyalty

Jerome Powell enters the final year of his term as Federal Reserve chair enjoying the support of labor unions with influence in Joe Biden’s White House, an advantage as the administration prepares to decide later this year whether to reappoint the central bank chief.

But Powell’s union support -- built in part through explicit outreach that the Fed chair has championed -- is likely to be tested as the rebound in growth strengthens and the jobless rate falls. The Fed is expected to hit a crossroad within months: Keep pumping cash into the economy to make sure the recovery benefits minority communities, or signal a pull-back to avoid inflation.

The crisis of the past year has highlighted long-standing disparities across the U.S. economy, a major focus for Biden and his top advisers. The unemployment rate for Blacks, who have a disproportionate share of lower-wage jobs and of union membership, was double that of Whites during much of the past 50 years, in part because the Fed historically tightened monetary policy just as the benefits of growth started reaching lower-income workers.

“His true test will be, once the economy starts to accelerate, whether he takes his foot off the gas prematurely,” said Steve Kreisberg of the American Federation of State, County and Municpal Employees, a union for government workers, referring to Powell. “That’s certainly what we saw out of the Fed 10 years ago. And it turned out to have real damaging consequences.”

That last tightening episode came long before the overhaul of Fed policy that Powell oversaw last year. The central bank said that it would now only raise interest rates after inflation had overshot a 2% target, and that it would let unemployment run lower than officials had previously tolerated.

“We will not tighten monetary policy solely in response to a strong labor market,” Powell said in explaining the new framework earlier this month.