Federal Reserve officials were running a huge experiment with America’s job market before coronavirus lockdowns gripped the American economy, one that could inform how officials think about unemployment — and the path for interest rates — in the pandemic’s aftermath.
The Fed came into 2020 planning to allow unemployment to sit at 50-year lows without trying to cool off the labor market by raising rates. Wages and inflation are usually expected to shoot higher when the job market is tight, but that relationship had remained muted even a decade after the 2008 financial crisis.
America will never know how many people might have gotten jobs had the trial run its course. The labor market was enjoying a slowly increasing employment-to-population ratio, stronger wages, and record-low minority unemployment rates when the pandemic abruptly closed businesses and kicked tens of millions out of their jobs.
But central bankers have learned a lesson over the past decade that could inform how they respond when economies reopen, the recovery picks up steam and unemployment falls. Instead of trying to offset very-low unemployment with higher interest rates, as they did between 2015 and 2018, they may simply remain patient when the job market begins to heal, humbled by the realization that the old inflationary rules seem to no longer apply.
That could leave interest rates, which have been set at near-zero since officials abruptly slashed them at a series of emergency meetings in March, at rock-bottom for years as the labor market mends.
“We’ve learned something very fundamental about our ability to associate levels of unemployment with inflation, or indeed,