Must-read: Dean Baker: “The Fed and the Quest to Raise Rates”

Must-Read: Dean Baker: The Fed and the Quest to Raise Rates: “The justification for raising rates is to prevent inflation from getting out of control…

…but inflation has been running well below the Fed’s 2.0 percent target for years. Furthermore, since the 2.0 percent target is an average inflation rate, the Fed should be prepared to tolerate several years in which the inflation rate is somewhat above 2.0 percent… [and] allow for a period in which real wage growth slightly outpaces productivity growth in order to restore the pre-recession split between labor and capital…. The most recent data provide much more reason for concern that the economy is slowing more than inflation is accelerating….

There are many other measures indicating that there continues to be considerable slack in the labor market despite the relatively low unemployment. There are no plausible explanations for the sharp drop in the employment rate of prime-age workers at all education levels from pre-recession levels, apart from the weakness of the labor market. The amount of involuntary part-time employment continues to be unusually high…. And the duration measures of unemployment spells and the share of unemployment due to voluntary quits are both much closer to recession levels than business cycle peaks…


Brad DeLong


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