Jobs numbers make case for a patient Fed
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.