Minneapolis Federal Reserve President Neel Kashkari on Friday said he expects recent high inflation readings will not last and Americans will return to the labor market in large numbers in the fall.
“We should see a lot more labor supply in the fall,” Kashkari said in a virtual event hosted by the Minnesota Council of Nonprofits and the Minnesota Council of Foundations, once the three main factors holding back labor supply – the closures of schools and daycare facilities, fear of the coronavirus, and extra unemployment benefits authorized by Congress – have faded.
He said that in general he is a “big skeptic” of employers who complain of worker shortages, saying a large part of it is a reluctance to raise wages.
As a first step, Fed policymakers plan in coming months to discuss whether the economy has made “substantial further progress” toward the central bank’s goals of maximum employment and 2% inflation. That is the bar the Fed has set before moving ahead with any reductions to its $120 billion in monthly asset purchases.
The Fed hasn’t defined what it means by maximum employment.
Kashkari said the economy is down 7 million to 10 million jobs from where it would have been without the pandemic, and that he views maximum employment to be “at a minimum” getting those jobless Americans back to work.
Other policymakers appear less convinced that those jobs will all return, with several noting that many more Americans retired during the pandemic than normally would be expected, and it’s unclear that they will be returning to the workforce.
The debate also hinges on a judgment of how long the current bout of inflation will last, and how much of the rise in prices will end up continuing to push inflation up further next year and beyond. Kashkari on Friday laid out the case that current high inflation will not last because businesses will readjust to faster growth.
To judge how much of the inflation could persist, he said, the labor market is key. “If the 7 million or 8 million of 10 million Americans who are not working today, if they are never coming back, then that would give me much more concern that these high inflation readings might be here to stay,” Kashkari said. “But I believe they are coming back,” he said, pointing to the experience of the last U.S. economic expansion before the pandemic.
“Every time we thought the U.S. economy was out of workers, and wages started to climb a little bit, workers came off the sidelines,” he said.