I’ve read a number of commentaries around this morning’s job report that lead me to believe people are scratching their heads much too hard as regards the recent data flow and the Fed’s next move (see analysts’ comments in Bin Appelbaum’s piece here, e.g.).
Of course there’s uncertainty, and not every single indicator points the same way, but I’m quite confident in asserting that incoming information will keep Ben and co. in high accommodation mode for numerous months to come.
–Ok, the unemployment rate went down today from 7.6% to 7.4%. But a few days ago Bernanke said: “Currently we have an unemployment rate of 7.6 percent, which I think if anything overstates the health of our labor markets given participation rates and many other indicators of under employment and long term unemployment so we are not there obviously on the maximum employment part of the mandate.”
A two-tenths tick down that was partly (though not mostly) driven again by a small decline labor force participation doesn’t much alter that position. Especially given that the employment rate, which is unaffected by labor force dropouts, remains stuck in the mud.
–Inflation has been decelerating. As shown in the figure below, the core PCE, closely watched by the Fed, appears to have slowed significantly in recent months.
–Bernanke recently made clear that the Fed’s 6.5% unemployment rate threshold for the fed funds rate is just that—a threshold, not a trigger. Even if the jobless rate keeps falling while the employment rate and inflation are pointing in the other direction, it’s not at all a slam dunk that everyone on the committee with get increasingly hawkish.
–GDP averaged 1.4% in the first half of the year. That’s below trend for the economy, and below the Fed’s forecasts, which have consistently been optimistic. Typically, systematic forecast errors change expectations.
And this is all about expectations. If the FOMC thought that all of the above were true but that growth, inflation, and jobs were about to bust out all over, then maybe I’d join head scratchers. But I don’t think that’s going to happen. (Techie point for deep Fed wonks: another way to say this is that if you fed [sic] recent data into Yellen’s optimal control model, I think you’d get a result that pushed out the date when they lift the funds rate.)
Thus, the key question is to what extent Ben and the others are data driven right now. I think most are solidly in that mode, so as long as the data are broadly pointing towards continued accommodation, I’d expect the punch to keep flowing.