Under normal conditions, unemployment is a proxy for misery, and is caused by a shortfall in demand. Under today’s pandemic conditions, neither of these things is true. The federal stimulus and enhanced unemployment benefits gave workers a savings cushion, and thus permitted them to hold out for better jobs, and there is no shortfall in demand for goods, as evidenced by inflation and supply chain problems.
If the pandemic were to disappear tomorrow, it is likely that millions of people who have left the job market for covid-related reasons would rejoin the workforce; as a result, the number of new jobs would skyrocket, and GDP would increase significantly, but the unemployment rate would remain about the same. Unfortunately, however, the pandemic is not going to disappear any time soon. So what should the Fed do?
The Fed is correct to view the current state of affairs as full employment, the new job numbers notwithstanding, so additional stimulus is unnecessary. Raising interest rates, however, will neither resolve supply chain problems nor cool off the demand for goods, which is being fueled by excess savings, not credit. All it will do is drive the markets down and add to the pain of the pandemic. The correct course of action is to rely on symbolism, rhetoric, and patience rather than large rate increases to fight inflation.