Morning Must-Read: Jan Hatzius on the U-6 Unemployment Rate and Its Implications

Via Matthew Boesler, Jan Hatzius: U-6 Unemployment:

Is it really possible that the unemployment rate reaches 6.1% by the end of 2014 but the first hike does not occur until early 2016, as we currently forecast? We still believe that this is the right baseline forecast… ‘optimal control’ considerations and the possibility of a temporarily depressed neutral rate provide reasons for keeping rates lower…. But… observable measures which do not depend on our ability to measure the structural participation rate… confirm that there is still a significantly larger amount of slack than implied by the 6.7% unemployment rate on its own. In particular, the U-6 measure of underemployment… still stands at 13.1%, which historically is consistent with an official unemployment rate of 7.5-8%. The behavior of wages also points to a large amount of slack…. Our inflation forecast only calls for a very slow acceleration that still leaves the core PCE index at 1.7% in early 2016. If this is the right call, we think a hike before early 2016 is unlikely…