What the Fed should do next

Business Mirror - - OPINION - Bloomberg View

IF the Fed­eral Re­serve (the Fed) was look­ing for reasons not to raise in­ter­est rates when its pol­icy- mak­ing com­mit­tee meets later this month, it now has two. To­day’s new and sur­pris­ingly weak US em­ploy­ment num­bers, added to in­vestor anx­i­ety about a pos­si­ble Bri­tish exit from the Euro­pean Union, make a plau­si­ble case for leav­ing short- term in­ter­est rates un­changed.

That would be a mis­take. The Fed needs to step back and con- sider. A Bri­tish exit and volatile US jobs num­bers notwith­stand­ing, the bal­ance of ev­i­dence con­tin­ues to shift. The case is strong for mov­ing mon­e­tary pol­icy back to­ward nor­mal— gen­tly but pur­pose­fully, and with­out fur­ther de­lay.

The US la­bor mar­ket is hard to read. Em­ploy­ers added just 38,000 jobs in May— sur­pris­ingly low, even al­low­ing for the fact that the fig­ures are volatile and a strike at Ver­i­zon kept 35,000 work­ers off the monthly pay­roll count. On the other hand, the un­em­ploy­ment rate, re­flect­ing ex­its from the la­bor force, fell to 4.7 per­cent, sug­gest­ing a pretty tight mar­ket. Pay was up, as well, for an in­crease of 2.5 per­cent over the pre­vi­ous year.

Th­ese conf lict­ing num­bers make it hard to mea­sure slack in the la­bor mar­ket—hence the scope for boost­ing out­put and em­ploy­ment through fur­ther stim­u­lus. The main ques­tion is how many of the work­ers who’ve stopped look­ing for jobs would get back into the la­bor mar­ket if em­ploy­ment op­por­tu­ni­ties im­proved. The ev­i­dence sug­gests that a di­min­ish­ing but still sig­nif­i­cant num­ber of peo­ple would do so. This is the case for keep­ing mon­e­tary pol­icy loose.

Bear in mind, though, that mon­e­tary pol­icy is cur­rently ex­tremely loose by any con­ven­tional mea­sure, and still would be if the pol­icy rate was raised an­other quar­ter- point. Very low in­ter­est rates and a mas­sively ex­panded cen­tral- bank bal­ance sheet (thanks to a pro­longed spell of quan­ti­ta­tive eas­ing) are dis­tort­ing as­set prices and cre­at­ing prob­lems for the fu­ture. What’s more, as a way to stim­u­late de­mand, they seem less and less ef­fec­tive.

In short, the case for main­tain­ing stim­u­lus is strong, but the case for do­ing it with mon­e­tary pol­icy isn’t.

Ideally, the US would nor­mal­ize its eco­nomic pol­icy by com­bin­ing fis­cal stim­u­lus with a more cau­tious mon­e­tary pol­icy. The coun­try badly needs to re­pair and im­prove its in­fras­truc­ture. Bor­row­ing for that pur­pose would be good for the econ­omy and, un­der cur­rent con­di­tions, eas­ily af­ford­able. The Fed doesn’t con­trol fis­cal pol­icy, but it can and should sig­nal that it’s no longer will­ing to carry the whole bur­den of re­viv­ing the econ­omy, and that the bal­ance of fis­cal and mon­e­tary stim­u­lus is dan­ger­ously out of kil­ter. It needs to avoid the sus­pi­cion that it’s dither­ing and that su­per-low in­ter­est rates will be avail­able in­def­i­nitely.

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