I’m confident one can trust the Yellen-led Fed to largely tune out the building chorus telling them to pre-emptively tighten because somewhere, somehow, there’s some inflation out there.
That doesn’t mean they’re all inflation doves—remember, Yellen was bugging Greenspan to tighten in the mid-1990s (thankfully, he didn’t take her advice as the economy hit full employment and price pressures failed to appear). It just means that in weighting their dual goals, based on the data, they should still be up-weighting full employment over price stability. Output gaps remain a much larger challenge than price pressures.
Some arguments on behalf of the above:
—Wage pressures…really? According to the BLS earnings report out this morning, average earnings before inflation were up 2.2% year-over-year (that’s the best way to asses these noisy monthly data). A year ago, they were up 2.1%. Nothing much to see there.
Also, weekly hours have fallen in the last few months, and while weather’s possibly playing a role in that result, weekly earnings have decelerated quite sharply, from 2.1% a year ago to 1.3% now. Again, take the weather out and maybe that trend is flat, but no acceleration to speak of.
–There’s more of an acceleration in the pay of middle-wage workers (versus the overall average), but as I show here it’s both gradual and clearly not bleeding into price growth. And for crying out loud, wouldn’t it actually be smart and even a bit compassionate to tolerate some wage gains for folks who’ve been pretty much left out of this recovery thus far?!
–Inflation is the bottom line here and as the figure below shows, core prices have been decelerating for the last couple of years. Now, the hawks claim to be looking round corners and seeing price pressures where others cannot. But the Cleveland Fed’s five-year-ahead expectations index remains extremely well-anchored below 2%.
–Unit labor costs—compensation growth relative to productivity, so an important indicator of any wage-push inflation—fell a percent in the most recent data (see table 2; again, I’m looking at yr/yr), and have also decelerated over the past few years.
Based on these types of observations, I expect the Fed to continue the $10bn/meeting taper and to make sounds about how they’re watching the data like hawks…just not inflation hawks.
Source: BLS, BEA, and Cleveland Fed