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Illustration: Aïda Amer/Axios

The Fed is ditching the "take away the punch bowl" mentality, which economists say choked employment opportunity for low-income, Black and Latino workers.

Why it matters: The central bank says the shift will help "foster economic conditions that benefit everyone," and be more inclusive for the communities that aren't lifted when the economy first begins to recover.

What they're saying: "When a central bank 'takes away the punch bowl,' what that means is they are tamping down on the recovery — just as marginalized communities are seeing benefits," Laura Veldkamp, economics professor at Columbia Business School, told Axios.

Catch up quick: The Fed no longer thinks there’s a trade-off between low levels of unemployment and inflation, a historic pivot for the central bank.

  • The Fed left "potential employment gains on the table" when they started to raise rates between 2015 and 2018 in an attempt to head off inflation that never manifested, the Peterson Institute's Adam Posen said during a media call on Thursday.

The backdrop: The announcement is the culmination of the Fed's nearly two-year long review of its policies and a series of events with community leaders who gave feedback about the Fed's policies.

  • Maurice Jones, CEO of Local Initiatives Support Corporation, told officials at a Fed Listens event last year that “focusing on prolonging the growth of the labor market and not being so wedded to 2% inflation” is most important.
  • "The longer we can get growth in the labor market, the more likely the folks that we serve and low-wealth communities will find a viable pathway to living wage jobs and careers," Jones told Axios, following Powell's speech.

The big picture: The renewed emphasis on more "inclusive" monetary policy goals come as the Fed faces pressure to tackle exacerbating racial inequality.

  • "This change reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities," Powell said.

What to watch: It will be a while before the Fed's shift plays out in practice. The August jobs report due out next week is expected to show the overall unemployment rate tick down a mere 0.2 percentage points, per FactSet. That still leaves the jobless rate at the worst level in over 10 years.

Between the lines: The most immediate impact is reassurance to market participants that the low interest rate environment will be here for longer than previously thought.

  • Rates on mortgages, credit cards and auto loans will remain low — though the cost to borrow is less meaningful for lower-income communities that often don't have access to these products in the first place, Jones points out.
  • Longer periods of low rates will also up the appetite for stocks and bonds, as one trader told WSJ, possibly exacerbating the divide between those who own stocks and benefit from the market's rebound and those who don't. (As CNBC's Jim Cramer said after Powell's speech: "Powell is on the side of the bulls.")
  • "We are certainly mindful that higher prices for essential items, such as food, gasoline, and shelter, add to the burdens faced by many families, especially those struggling with lost jobs and incomes," Powell said.

The bottom line: Powell's Fed has said it's willing to let the economy run hot, a boon for communities that need low unemployment rates to feel the effects of an economic recovery.

Go deeper

Dion Rabouin, author of Markets
Dec 4, 2020 - Economy & Business

U.S. markets brace for possible inflation spike

Expand chart
Data: ISM; Chart: Axios Visuals

A spate of recent U.S. economic data releases suggest that inflation could be making a major comeback.

Driving the news: Thursday's report on the U.S. services sector for November from the Institute for Supply Management was slightly better than expected but still down from October's reading, however, the bigger story was in the prices paid index.

U.S. economy adds 245,000 jobs in November as recovery slows

Data: BLS; Chart: Axios Visuals

The U.S. economy added 245,000 jobs in November, while the unemployment rate fell to 6.7% from 6.9%, the government said on Friday.

Why it matters: The labor market continues to recover even as coronavirus cases surge— though it's still millions of jobs short of the pre-pandemic level. The problem is that the rate of recovery is slowing significantly.

Trump nominee Christopher Waller confirmed to Fed board

Christopher Waller at a Senate Banking hearing earlier this year. (Photo: Sarah Silbiger/Getty Images)

The Senate voted 48-47 on Thursday to confirm Trump nominee Christopher Waller to the Federal Reserve Board of Governors — filling one of the two vacant slots on the influential economic body.

Why it matters: It's one of the last marks left on the Fed board by Trump, who has nominated four of its six members (five including Jerome Powell, who was elevated to chairman under Trump).