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Why the Fed frets about both jobs and inflation

After six years of financial stimulus to mitigate the fallout from the 2008 collapse, the Federal Reserve is ending its money creation programs. But the country is still in economic recovery and the role of the Federal Reserve is still being debated. Economics correspondent Paul Solman reports on the dual nature of its mission to keep inflation in checking while creating jobs.

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  • GWEN IFILL:

    The mission of the Federal Reserve has long been the subject of debate, especially since the 2008 financial crisis. Six years later, the economy is recovering, but the Fed's role is still being questioned.

    Paul Solman has the story, part of his ongoing reporting Making Sense of financial news.

  • PAUL SOLMAN:

    For the Federal Reserve, today marks an historic moment, the end of six years of unremitting financial stimulus, the money creation programs known as quantitative easing.

    This is actually the third easing the Fed has done since the crash. We met Brian Sack on the floor of New York Fed back in 2009, when it all began.

    BRIAN SACK, Former Markets Group Chief, Federal Reserve Bank of New York: The way we create money is by buying securities.

  • PAUL SOLMAN:

    Securities like U.S. Treasury bonds and mortgage-backed bonds from banks and other financial institutions.

  • BRIAN SACK:

    So when the Federal Reserve buys a Treasury security, it's putting funds into the financial sector.

  • PAUL SOLMAN:

    Now, since the crash of '08, the Fed has created $3.5 trillion. Why? To lower interest rates and thus spur consumer and business spending, creating new jobs. But, of course, creating too much money risks serious inflation. So the Fed frets about both, jobs and sound money, a reason it decided today to stop injecting cash into the economy.

    President Obama cited the dual mandate when nominating his own Fed chair, Janet Yellen, last year.

  • PRESIDENT BARACK OBAMA:

    I have considered a lot of factors. Foremost among them is an understanding of the Fed's dual mandate, sound monetary policy to make sure that we keep inflation in check, but also increasing employment and creating jobs.

  • PAUL SOLMAN:

    Now, stories about the Federal Reserve can be pretty hard to follow. But the Fed's dual mandate is so straightforward, it can actually be put into song, as Harvard-trained, Nashville-based money manager Jon Shayne proved to us via his country and Western alter ego, Merle Hazard.

    JON "MERLE HAZARD" SHAYNE, Money Manager (singing): I have got a dual mandate, dual mandate. I got to keep prices stable, while giving jobs to those who are able.

  • PAUL SOLMAN:

    OK, a dual mandate. But which matters more, prices or jobs?

    Liberal economist Paul Krugman of Princeton acknowledges the appeal of price stability.

  • PAUL KRUGMAN, Princeton University:

    This kind of visceral sense that easy money is a bad thing. But, you know, it's — even if it is, lack of jobs is a worse thing, and that's — that's what we should be worrying about.

  • PAUL SOLMAN:

    But Columbia University economist Charles Calomiris insists that conservatives worry about employment too.

  • CHARLES CALOMIRIS, Columbia University:

    That's all we really care about, but the reason that we focus on inflation, and should focus more on it, is because it's a tool, a tactic to achieve full employment.

  • PAUL SOLMAN:

    Now, Columbia is a campus of statues, none more familiar than Auguste Rodin's Thinker. But even this guy can't be pondering the perils of inflation, can he, currently running at a measly 1.7 percent, below even the Fed's modest target of 2 percent. But Calomiris is concerned about all the money the Fed has created.

  • CHARLES CALOMIRIS:

    It's grown its balance sheet from under a trillion to four times that just in a few years.

  • PAUL SOLMAN:

    Banks have been holding on to that money. But once they start lending again, says Calomiris:

  • CHARLES CALOMIRIS:

    All of a sudden, we have a major risk of inflation. And then the question is, well, can the Fed move quickly enough to shrink its balance sheet or do something else to prevent that inflation?

  • PAUL KRUGMAN:

    People who are complaining about the Fed are people who've been predicting runaway inflation for five years, six years, and it hasn't happened.

  • PAUL SOLMAN:

    And thus, Janet Yellen's plight.

    JON "MERLE HAZARD" SHAYNE (singing): The rich folks like to see the currency strong, but the average Joe's not overjoyed if he's destitute and unemployed. Seems like every time I choose, I'm choosing wrong.

  • PAUL SOLMAN:

    Rich folks like to see the currency strong because they are creditors, lenders. With inflation, borrowers pay them back with money that's worth less than when it was loaned. An expansionary Fed, by contrast, appeals to both borrowers and to labor, hoping for jobs. Yes, unemployment is down, but, says Krugman:

  • PAUL KRUGMAN:

    One way to tell is the labor market really tight, are there jobs available, is to look at wages. Wages are going nowhere.

  • PAUL SOLMAN:

    They actually went down last month slightly.

  • PAUL KRUGMAN:

    Yes, so this feels like a very — a weak labor market.

  • PAUL SOLMAN:

    But the average Joe's not overjoyed if he's destitute and unemployed, right?

  • CHARLES CALOMIRIS:

    Absolutely. He's also not overjoyed when interest rates are so low that, if he has a savings account in the bank, he's earning very little interest. It's really the rich who've mainly benefited from hyper-loose monetary policy recently.

  • PAUL SOLMAN:

    At a photo-op recently, Yellen surrounded herself with unemployed Bostonians. Calomiris wasn't happy about it.

  • CHARLES CALOMIRIS:

    What message is she sending out? And why would a Fed chairman do this? It's unprecedented.

  • PAUL SOLMAN:

    Krugman, by contrast, loved the photo-op.

  • PAUL KRUGMAN:

    It's actually — it's a very shrewd move on her part to do that, to be so un-Central Banker like. She's saying, I care about the unemployed a lot.

  • PAUL SOLMAN:

    And so, the Fed's dilemma: tighten to protect the currency vs. loosen to create jobs, right vs. left.

    JON "MERLE HAZARD" SHAYNE (singing): It's tough for me to make our economy grow. My job is harder than you will ever know.

  • PAUL SOLMAN:

    I'm Paul Solman reporting for the "NewsHour."

  • GWEN IFILL:

    And you know you want it. We have more from singer Merle Hazard, if that's his name. Watch the Nashville money manager perform his latest ballad on our Making Sense page.

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