JOBS SHIFT TO CENTER STAGE

For three decades, the Federal Reserve has believed that the path to economic prosperity is in fighting inflation. But it is realizing that is no longer enough. The central bank for the first time is making an attempt to shape the labor market, believing that reducing unemployment is the key to the recovery. It has tied billions of dollars of stimulus money to the health of the labor market.

 

It has vowed to keep interest rates at historic lows until the unemployment rate is at least 6.5 percent. Top officials have begun addressing the issue in increasingly urgent and personal tones. The focus on jobs represents a historic shift for the central bank that began with the 2008 financial crisis and has intensified in the face of four years of middling economic growth. But how much influence the central bank wields over unemployment remains an open question: It cannot direct businesses to hire or inspire entrepreneurs to create jobs. Meanwhile, warnings have grown louder that the quest to bring down unemployment could have unintended consequences - including stoking inflation that a generation of central bankers worked to tame.

 

 The effect that has on inflation has been well established: When prices rise too fast, the Fed raises its target for interest rates and slows down growth. When prices fall too low, it lowers the target to encourage consumers to spend money, driving prices back up. Part of the challenge of focusing on the unemployment rate is first determining how low it can actually get. Fed officials' estimates range between 5 and 6 percent, but the real number may be unknowable.
 
In addition, the connection between interest rates and employment gets murky. Low rates stimulate consumer demand and boost businesses' bottom line. But the recovery has shown that doesn't always translate into job growth.