Con­flict­ing eco­nomic in­di­ca­tors chal­lenge Fed

The Pak Banker - - OPINION - Binyamin Ap­pel­baum

THE con­trast be­tween the im­prov­ing health of the la­bor mar­ket and the weak­ness of other eco­nomic in­di­ca­tors poses a chal­leng­ing quandary for the Fed­eral Re­serve. Janet L. Yellen, the Fed's chair­woman, and other of­fi­cials have said the Fed must raise its bench­mark in­ter­est rate as job growth con­tin­ues to pre­vent higher in­fla­tion down the road. The strength of the Jan­uary jobs re­port -in­clud­ing faster wage growth - sug­gests the Fed's pol­icy-mak­ing com­mit­tee still could raise rates as soon at its next meet­ing in March.

At the Fed would be bet­ting on a the­ory. In­fla­tion re­mains low, growth has slowed and the im­pact of global eco­nomic prob­lems and fi­nan­cial mar­ket volatil­ity is un­clear. If the Fed presses ahead, it could un­der­mine the econ­omy just as things are get­ting good for the vast ma­jor­ity of Amer­i­cans.

"My mes­sage to the Fed re­gard­ing this re­cent, long-awaited ac­cel­er­a­tion in wages is 'Love it and leave it alone,'??" said Jared Bern­stein, an econ­o­mist at the Cen­ter on Bud­get and Pol­icy Pri­or­i­ties who pre­vi­ously served as the chief eco­nomic ad­viser to Vice Pres­i­dent Joseph R. Bi­den Jr. "If we want work­ing peo­ple to ben­e­fit from the ex­pan­sion, the last thing you'd want do is tap the brakes - es­pe­cially given the ab­sence of in­fla­tion­ary pres­sures."

The Fed raised

its bench­mark

rate

in De­cem­ber for the first time since the fi­nan­cial cri­sis. It had held rates near zero for seven years to en­cour­age bor­row­ing and risk-tak­ing. Ms. Yellen, speak­ing af­ter the an­nounce­ment, said the Fed planned to raise rates grad­u­ally, re­duc­ing those in­cen­tives be­cause the econ­omy no longer needed quite as much help.

She will speak pub­licly for the first time since then on Wed­nes­day when she tes­ti­fies be­fore the House Fi­nan­cial Ser­vices Com­mit­tee. In the in­ter­ven­ing two months, the eco­nomic out­look has de­te­ri­o­rated. Fi­nan­cial con­di­tions have tight­ened and the dol­lar has gained strength, weigh­ing on Amer­i­can ex­porters and de­lay­ing any re­bound in in­fla­tion. The Jan­uary jobs re­port, how­ever, re­flects con­sid­er­able strength in other parts of the econ­omy. Stronger wage growth is par­tic­u­larly likely to grab the Fed's at­ten­tion, sug­gest­ing that em­ploy­ers are fi­nally be­ing forced to com­pete for work­ers by rais­ing pay. In a high-pro­file ex­am­ple, Wal­mart, the na­tion's largest pri­vate em­ployer, has said that it plans to in­crease hourly pay rates for most of its em­ploy­ees later this month.

The Fed is less likely to worry about the slower pace of job cre­ation in Jan­uary, as of­fi­cials have pre­dicted that slower pop­u­la­tion growth would weigh on job cre­ation. In keep­ing with those ex­pec­ta­tions, the un­em­ploy­ment rate still fell to 4.9 per­cent. One rea­son the Fed is fo­cused on job growth is that it may be a more ac­cu­rate re­flec­tion of the strength of the un­der­ly­ing econ­omy. In the fourth quar­ter of 2015, for ex­am­ple, the govern­ment es­ti­mated the econ­omy added 279,000 jobs a month, but that out­put in­creased at a rate of just 0.7 per­cent.

Ja­son Furman, chair­man of the pres­i­dent's Coun­cil of Eco­nomic Ad­vis­ers, wrote in an anal­y­sis on Fri­day that the out­put fig­ures prob­a­bly re­flected some mea­sure­ment er­ror. "This il­lus­trates the im­por­tance of fo­cus­ing on a wide range of in­di­ca­tors - es­pe­cially la­bor mar­ket data, which tend to be less noisy - in as­sess­ing the health of the econ­omy," he said.

One wing of the Fed sees an undi­min­ished case for rais­ing rates. Es­ther L. Ge­orge, pres­i­dent of the Fed­eral Re­serve Bank of Kansas City and one of the 10 Fed of­fi­cials vot­ing on the di­rec­tion of pol­icy this year, said this week that the Fed "should con­tinue the grad­ual ad­just­ment of mov­ing rates higher to keep them aligned with eco­nomic ac­tiv­ity and in­fla­tion." She also played down con­cerns about the eco­nomic im­pact of re­cent mar­ket volatil­ity. "While tak­ing a sig­nal from such volatil­ity is war­ranted," she said, "mon­e­tary pol­icy can­not re­spond to ev­ery blip in fi­nan­cial mar­kets."

Loretta J. Mester, pres­i­dent of the Fed­eral Re­serve Bank of Cleve­land and an­other voter, said on Thurs­day in New York that it was "pre­ma­ture" to change her eco­nomic out­look. "At this point, solid la­bor mar­ket in­di­ca­tors, in­clud­ing strong pay­roll growth, and healthy growth in real dis­pos­able in­come, sug­gest that un­der­ly­ing U.S. eco­nomic fun­da­men­tals re­main sound," Ms. Mester said.

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