Jobs num­bers make case for a pa­tient Fed

The Pak Banker - - OPINION - David Ship­ley

The latest jobs fig­ures for the U.S. econ­omy are in line with ex­pec­ta­tions and won't al­ter the Fed­eral Re­serve's think­ing on when to start rais­ing in­ter­est rates. That mo­ment is ap­proach­ing. Many an­a­lysts ex­pect liftoff next month -- a guess that the Fed has lately done noth­ing to chal­lenge. Would an in­crease in Septem­ber, at its next meet­ing, be the right move?

On bal­ance, it would be bet­ter to wait a lit­tle longer. But the truth is, the tim­ing of that first rise mat­ters less than what the Fed thinks and says about its sub­se­quent ap­proach to nor­mal­iz­ing mon­e­tary pol­icy. Pa­tience in tight­en­ing mon­e­tary con­di­tions should still be the watch­word, be­cause there's no sign yet of in­fla­tion and la­bor-mar­ket in­di­ca­tors are more am­bigu­ous than usual. But there are dif­fer­ent ways of be­ing pa­tient. The La­bor Depart­ment's fig­ures for July showed a healthy in­crease of 215,000 in the pay­roll mea­sure of jobs. The un­em­ploy­ment rate was un­changed at 5.3 per­cent, close to what most econ­o­mists would see as full em­ploy­ment. Yet there's still no sign of in­fla­tion. Hourly earn­ings have risen barely 2 per­cent over the past year, and in the past few months the pace has been even slower. For the mo­ment, broader mea­sures of em­ploy­ment cost tell es­sen­tially the same story.

These signs are at odds: At full em­ploy­ment, you'd ex­pect at least a whiff of in­fla­tion in the wage fig­ures. The re­cent re­ces­sion was ex­cep­tion­ally se­vere and pro­longed, which makes the em­ploy­ment and un­em­ploy­ment num­bers hard to de­code. It's dif­fi­cult to say how much spare ca­pac­ity the econ­omy still has, and how much fur­ther un­em­ploy­ment might fall with­out push­ing prices up. If the Fed takes its foot off the gas too soon, peo­ple who might oth­er­wise have found jobs will be left be­hind. That's the case for pa­tience, and it's still strong. But there are dif­fer­ent ways to fol­low this ad­vice. A small in­crease in the pol­icy rate in Septem­ber fol­lowed by an ex­tended strat­egy of gen­tly boost­ing rates as em­ploy­ment con­tin­ues to rise would be one way. The al­ter­na­tive is to de­lay liftoff un­til a clearer sig­nal of ris­ing in­fla­tion ap­pears, and then in­crease rates more abruptly. The choice in­volves a dif­fer­ent bal­ance of risks. Mov­ing soon may lessen the dan­ger that in­fla­tion will over­shoot its 2 per­cent tar­get, but this might be at the cost of jobs for­gone. The lat­er­but-steeper ap­proach not only risks an over­shoot, but may also dis­con­cert in­vestors and in­tro­duce ex­tra volatil­ity.

It's a close call. On bal­ance, de­lay­ing a lit­tle longer, un­til wages start to move, makes bet­ter sense. In ei­ther case, though, the Fed must do more to get it­self and the fi­nan­cial mar­kets used to the idea that the 2 per­cent in­fla­tion tar­get is in­deed a tar­get and not a ceil­ing. What's the dif­fer­ence? Tar­gets, un­like ceil­ings, are sup­posed to be sym­met­ri­cal: An over­shoot is no worse than an un­der­shoot. Core in­fla­tion has come in be­low tar­get month af­ter month. If pa­tience in rais­ing in­ter­est rates causes it to over­shoot -- briefly and not by much -- that shouldn't be seen as a fail­ure. Un­der Janet Yellen's lead­er­ship, the Fed has man­aged ex­pec­ta­tions skill­fully. The cen­tral bank is slowly help­ing fi­nan­cial mar­kets to be less in­ter­ested in the cal­en­dar and more in­ter­ested in the data as it ar­rives. That's good, and the Fed should keep it up. There's noth­ing spe­cial about Septem­ber and no need to change this ba­sic data-led ap­proach. A bit more clar­ity on the na­ture of the in­fla­tion tar­get would be all to the good -- and would help the Fed to get more peo­ple back to work.

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