The Fed lowered its long-term unemployment rate…and a salient point re the R’s budgets

March 19th, 2015 at 8:22 am

Details at PostEverything.

Everyone’s wound up about precisely when liftoff will occur (when the Fed will first raise interest rates after about six years at about zero) but I think the big story is that the Fed lowered their “natural rate,” the unemployment rate consistent with stable inflation.

It’s a confusing time for Fed macromanagement for sure. They want to give accurate forward guidance, but they’re (admirably) data driven and don’t know the future, so they can’t telegraph precisely what they’ll do since they don’t know yet. To signal that they’re getting closer to liftoff, they took the word “patient” out of their post-meeting statement, but then Chair Yellen was compelled to point out, oracle-like, that just because they’re no longer patient doesn’t mean they’re impatient. So this part is getting a little silly.

But my CBPP colleague Isaac Shapiro made an important and interesting connection. While the Fed lowered their full-employment-unemployment-rate, an important move in favor of monetary accommodation on behalf of working people, Republicans in both the Senate and House released deeply austere budgets “which cut growth in short term and ignore addressing continued labor market slack and priorities such as full employment” as Isaac put it.

According to House R’s, “The growing probability of a debt crisis is the most urgent challenge the United States faces today.”  In fact, our fiscal outlook has improved considerably in recent years and the biggest threats it faces at this point are a) reckless budgets like the plans put forth by House and Senate R’s, both of which are virtually sure to add massively to deficits and debt, and b) their proclivity to play politics with the debt ceiling.

Meanwhile the actual challenge we face right now is getting to and staying at full employment. In this regard, while no one’s saying the Fed is perfect, they are far and away the most–I’d say the only–functional institution working on behalf of working people, yet another reminder of of the critical importance of their political independence.

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3 comments in reply to "The Fed lowered its long-term unemployment rate…and a salient point re the R’s budgets"

  1. Robert Salzberg says:

    The unemployment rate dropped down to around 4% without sparking strong inflation in the late 90s. Since Labor power has been increasingly swamped by Capital power since then, the NAIRU is most likely somewhere between 3 & 4%.

    Since we need a bit more than 2% inflation to catch up for years of sub 2% inflation, the Fed has no good reason to raise interest rates anytime soon. Since R’s will be controlling both the House and Senate for the next 2 years, continued austerity light will keep our economy on the cool side.

  2. Robert Salzberg says:

    The House & Senate budgets are exhibits A & B as to why the Fed can safely keep its powder dry till 2017.

  3. Richard Solomon says:

    Paul Krugman, the economist who is hated by the R’s for being ‘too progressive,’ has noted on more than a few occasions that the budget proposals made by the R’s so called fiscal guru Paul Ryan are all smoke and mirrors aimed to please their wealthy donors and constituents while sticking it to the average working man and woman, let alone the poor. Their revenue projections following tax cuts to the wealthy are consistently unrealistic. Although they decry deficits, they wish to enact policies that will increase them. Then they justify cutting more social programs because ‘we can’t afford them.’ Their real agenda is to reduce the size of government, except for defense related programs. And to lower the tax and regulation burdens of the so called ‘job creators.’ I bet we’ll hear that phrase again in the months leading up to the election in 2016!