Must-Read: Tim Duy: More Mediocrity

Must-Read: Three percent of the prime-age population who really ought to be at work right now in a full-employment economy are not at work. Whatever your estimate of potential output growth is, the economy is surely not growing markedly faster than it. Inflation is below your target. And yet the Federal Reserve believes that it is time to tighten policy?

It is very hard to understand…

Graph Employment Population Ratio 25 54 years FRED St Louis Fed
Tim Duy: More Mediocrity: “Federal Reserve Chair Janet Yellen will be playing a game of mixed messages with Congress tomorrow…

…as she explains why she believes a rate hike approaches in spite of lackluster data. Today’s data didn’t help… core spending growth is decelerating on a year-over-year basis to 2013 rates…. I think [the Fed] are concluding 2014 was sufficient to largely close the output gap, as evidenced by falling unemployment and other measures of labor underutilization. San Francisco Federal Reserve President John Williams even believes that optimally, US growth needs to DECELERATE in 2016…. Hence, Boston Federal Reserve President Eric Rosengren can say things to Reuters like:

If we do continue to get improvement in labor markets, if we do become reasonably confident that we’re moving back to 2-percent inflation, it may be appropriate as early as September,’ he said of raising rates from near zero. ‘I don’t think we have seen that evidence yet but we still have a couple months of data to see whether it’s more strongly confirmed.

Rosengren has long advocated for more monetary accommodation than most of his colleagues at the central bank…. One senses greater impatience on the more hawkish side of the FOMC. They will argue like Mester that the general consistency of underlying growth, steady improvement in labor utilization, and proximity to mandates signals it is time to leave behind the policies of the financial crisis…

July 14, 2015

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