My impression, similar to that of most Fed watchers, is that it would have taken a stronger jobs number— something north of 200,000 — to get them to tap the brakes by slightly raising the rate to slow the economy/job market a bit. Though they still, of course, might do so, this 150,000 payrolls number, in tandem with a few other points — elevated underemployment, low labor force participation rates, wages that are accelerating a bit but not pressuring prices — will likely stay their hand for now.
It’s that last bit on which I’d like to focus. As I recently explored on this page, many of the indicators that have historically served to guide the Fed are in flux today. For interesting reasons, many of which remain poorly understood, it is uniquely hard for them to identify:
— the “natural rate of unemployment”: the lowest unemployment rate consistent with stable prices;
— the “neutral interest rate”: the rate that’s neither stimulative nor contractionary;
— the slope of the “Phillips Curve”: the correlation between unemployment and inflation;
— the appropriate inflation target: they’re targeting 2 percent, but consistently missing it on the downside, and as I note here, many believe that target is too low.
Suppose — and this really hasn’t happened yet — that the tightening job market did start to raise price pressures. One model I track suggests that the Fed’s preferred inflation gauge (core PCE) — last seen at 1.6 percent, where it’s been six out of the seven months so far this year — would tick up to 1.7 percent by the end of this year and 1.9 percent by the end of 2017.
Let’s say that’s right. Well, remember, their 2 percent target is not a ceiling; it’s an average. Simply hitting 2 percent isn’t the goal, at least as I understand it. So if this forecast is ballpark, the Fed will have missed their target to the downside for about eight years by the end of 2017. That implies a considerable period above 2 percent to hit the average.
This is a remarkably long period of dis-inflation. It’s also evidence of the above-noted challenges facing contemporary monetary policy. But most of all, especially in light of today’s Goldilocks report with its not-too-hot-not-too-cold results, it’s a strong argument for less mysterious tea-leaf reading of trends that are supposed to influence inflation, and more focus on inflation itself.
I used to be a jazz musician. Sometimes, even the best players would get lost in the tune, unsure of the chord changes or the rhythms (as for how good I was, consider what I’m doing today). In such cases, the advice was “when in doubt, lay out.”
That’s good advice not just for stumbling musicians but also for Fed officials trying to figure out monetary policy in the contemporary macroeconomy. Importantly, let that learning process proceed without unnecessarily dinging those who depend of full employment to finally get a fair shot at the growth that’s been eluding them for years.