1) The sharply stronger dollar, as Martin Wolf points out, pushes against Fed tightening: it reduces inflation, weakens demand for our exports, and by most analysts accounts, will lower real GDP growth by something on the order of 0.5% over the next year, given its recent appreciation.
2) In their just released minutes, the Fed board clearly identified with the asymmetric risk that many of us Fed watchers have been emphasizing: “Many participants indicated that their assessment of the balance of risks associated with the timing of the beginning of policy normalization had inclined them toward keeping the federal funds rate at its effective lower bound for a longer time.”
3) Some recent reports suggest a tension among FOMC members as to whether they should be data driven or just basically assume that inflationary pressures lurk around the next corner, despite what the data say. The minutes from January revealed that “a number of participants emphasized they would need to see either an increase in market-based measures of inflation, compensation or evidence that continued low readings on these measures did not constitute grounds for concern” (i.e., disinflation).
4) Remember, nobody knows what the “natural rate of unemployment” is, which is kind of a big deal in this space. The fact that our unemployment rate, now around the mid-fives, is close to the level that many US economists, including those at CBO and the Fed, consider to be the “natural rate” and yet neither nominal wages nor prices have accelerated only serves to underscore this point.
Given economists’ traditional understanding of such dynamics, this means that either the natural rate of unemployment is considerably lower than we think it is or the jobless rate is mis-measuring labor market slack.
I believe all three are true. That is, the natural rate is lower than we think (and very difficult to reliably estimate). Allen Sinai says it’s now 4.3%.
Two, there’s still more slack in the US job market than the measured unemployment rate reveals. I’ve got a new post on that in the making.
And three, our “traditional understanding of such dynamics” is incomplete. Specifically, we’ve historically paid too little attention to a key wage determinant: bargaining power.
So, there you have four factors pointing towards holding rates steady at zero for the near term. Which factors point the other way? There’s the tightening job market, for sure, but see #4 above. Given our uncertainty re key parameters, surely the best move is to stick with the data and keep your anti-inflation powder dry. Which sounds a lot like where at least some members of the FOMC are in fact at…at least for now.