Must-Read: Lael Brainard: Navigating the Different Signals from Inflation and Unemployment

Must-Read: Once again:

Over the past 30 years we have had three business cycle peaks—1990, 2000, and 2007—and three business cycle troughs—1993, 2003, and 2009. The 2009 trough—what marked the nadir of what I now call the Longer Depression, at least as far as Europe is concerned—was an extraordinary and anomalous disaster. Taking the averages of the other peaks and troughs tells us that an economy with a prime-age employment-to-population ratio of 78.5% is still depressed relative to its normal sustainable configuration, while an economy with an employment-to-population ratio of 80.5% or above is in some kind of potential danger zone—although in all of 1990, 2000, and 2007 the danger has come from financial imbalances rather than accelerating wage-push inflationary pressures.

I remember back in mid-2014 when the prime-age employment-to-population ratio was 76.5%: I was then told that it was an unreliable indicator—that structural changes and hysteresis on the downside had made it next to impossible to get those missing prime-age workers back into employment. More than “I was told”, in fact: I greatly feared it myself.

Well, that was wrong.

So why say “the prime-age employment-to-population ratio—remains more than 1 percentage point below pre-crisis levels” rather than “the prime-age employment-to-population ratio remains at levels that before 2010 we would have characterized as depressed and indicating substantial economic slack”?

Lael Brainard: Navigating the Different Signals from Inflation and Unemployment: “The labor market has continued to strengthen… https://www.federalreserve.gov/newsevents/speech/brainard20170530a.htm

…the employment-to-population ratio has reached a new post-recession high…. The… U-3 measure of the unemployment rate moved down to 4.4 percent… the cyclical low reached in 2006-07…. There is little indication of an outbreak of inflation—rather, the latest data on inflation have been lower than expected…. Even wage inflation, which is most tightly connected to labor market slack, shows little sign of heating up by most measures…. Traditionally, economists assessed that as labor market slack diminished and the economy approached full employment, upward pressure on inflation would result, in the statistical relationship known as the Phillips curve. But I am not confident we can count on the Phillips curve to restore inflation to target in today’s economy…. The anchoring role of inflation expectations remains critically important….

It is also possible that the… unemployment rate still may be overstating the strength of the labor market…. Another key measure—the prime-age employment-to-population ratio—remains more than 1 percentage point below pre-crisis levels, and further improvement there would be welcome…