By Ann Saphir

(Reuters] – It may seem that the Federal Reserve will soon take an inflation-fighting stance. This could make it appear as though the U.S. central banks might have to give up its goal for broad, inclusive employment after just one year.

It is difficult to make a decision between reining inflation with a rise in the Fed’s overnight benchmark interest rates or encouraging full employment through keeping it at the close-zero level.

Some progressives see value in the Fed’s ability to shift gears over the coming months, as it could soon achieve its employment goal through some measures.

Skanda amarnath, the executive director at Employ America (a left-leaning group that has spent much time during the COVID-19 pandemic urging the Fed to allow the economy to heat up), stated “Getting to credible estimates of maximum employment [is] much easier than people think… we are nearly there.”

At Wednesday’s two-day policy meeting, the central bank is expected to take the first step towards its pivot. The widely-anticipated acceleration in its bond-purchasing taper will be announced. This would allow for the tricky proposition of raising the interest rate next year.

Some argue that Fed should quickly get off the pedal in the face of inflation and begin to tap the brakes for slowing economic activity before price rises spiral out of control.

This could mean that you are reversing a September 2020 promise to keep the federal funds rates at the low-zero rate until the labor market is fully healed. However, giving up job gains in order to manage inflation seems like a compromise Fed Chair Jerome Powell must make.

Powell seems to have acknowledged that possibility, telling Congress last month that Fed should balance its inflation goal and maximum employment goal when they’re in tension like they are now.

Some analysts believe the Fed might be able to avoid making a hard choice between its objectives if the labor force continues to grow.

For example, Employ America’s Amarnath says that between April and June, the job market will be at its strongest since before the pandemic. It is based on two key measures: employment of Americans between 25 and 54 years old and wage growth.

He stated that, even if inflation was still high, the Fed would not abandon its commitment to maximum job creation if they raised their interest rates.

THE ESCAPE CLAUSE

One reason why there is a debate about the topic in the first instance, it because the U.S. central banks doesn’t know how to measure maximum employment.

There are more job opportunities than ever, as wages continue to rise rapidly. However, there are now 3.6 million less people working today than in the years before the pandemic. If some people face higher barriers to employment, it’s difficult for the labor market recovery to be seen as inclusive and broad. Although the Black unemployment rate fell faster than that of overall unemployment in November, it is still higher than the 4.2% national average.

According to Michael Brown (NYSE:), principal U.S. economic advisor at Visa (NYSE), the Dashboard of Labor Market Indicators looks much better together than in 2017. This was when the Fed was just entering its last rate-hike cycle. According to Brown, the Fed will declare it has reached its maximum employment target in June and raise interest rates accordingly.

Some argue that the Fed’s goal of full employment may have to be sacrificed in order to deal with inflation, and avoid an even worse job market later.

Nela Richardson is chief economist for ADP. “Inflation can be like a tax…too high inflation could also affect the progress of labor markets,” she said.

After many years of slow inflation, even when interest rates were extremely low, she stated, “now that inflation is back, there’s a cost. A real cost is that the Fed is keeping rates high.”

Kathy Bostjancic is the chief U.S. economic economist at Oxford Economics. She believes that inflation will decline by itself in 2022, as supply chain constraints decrease. This allows Fed policymakers to delay raising rates until September.

Bostjancic stated that while inflation tendencies can make people nervous, they won’t necessarily be dependent on achieving maximum employment before raising rates.

She believes they will invoke the Fed’s escape clause, which was adopted August 2020. This allows policymakers to relax and resolve tensions between reaching their goals. It gives them the flexibility to raise rates if there is an overshoot in inflation or undershoot in jobs.

Aneta Markowska from Jefferies (NYSE) says that using the escape clause in order to justify rate rises before the economy reaches full-employment could put the Fed at risk of losing its credibility when it comes up against an inflationary situation.

The Fed will wait until September before raising interest rates. She expects that the U.S. unemployment rate will fall below 3.5% by then, Black unemployment to reach its pre-pandemic low, and the labor force participation level to recover – all indicators of full employment. Markowska indicated that at that time, Markowska believes the Fed will raise interest rates more quickly than current financial markets anticipate.

She said, “The entire point of the framework it that you allow your economy to overheat to so that eventually you can hike aggressively.”