Morning Must-Read: Charles Evans: Patience Is a Virtue When Normalizing Monetary Policy

Charles Evans: Patience Is a Virtue When Normalizing Monetary Policy: “At the end of the second quarter of 2014…

the labor force participation rate was between 1/2 and 1-1/4 percentage points below trend… as much as 3/4 of a percentage point below predictions based on its historical relationship with the unemployment rate…. Virtually all the gap during this cycle has been due to withdrawal from the labor market of workers without a college degree…. If skills mismatch were an ongoing problem, we’d expect to see wages rising for those with the skills in demand…. Pools of potential workers other than the short-term unemployed, notably the medium-term unemployed and the involuntary part-time work force, substantially influence wage growth at the state or metropolitan statistical area level…. Current circumstances and a weighing of alternative risks mean that a balanced policy approach calls for being patient in reducing accommodation…. The biggest risk we face today is prematurely engineering restrictive monetary conditions…. If we were to… reduce monetary accommodation too soon, we could find ourselves in the very uncomfortable position of falling back into the ZLB environment…. There are great risks to premature liftoff…. And the costs of being mired in the zero lower bound are simply very large…

September 25, 2014

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