Conflicting economic indicators challenge Fed
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
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.