Must-Read: Charles Evans: Thoughts on Leadership and Monetary Policy

Must-Read: Three people so far have told me that Chicago Fed President Charlie Evans’s “Leadership” speech is superb, and the kind of speech that the Fed Chair really ought to be giving these days–what with 10-year Treasury rates kissing 2%/year and the 10-year inflation breakeven below 1.5%/year:

Graph 10 Year Treasury Constant Maturity Rate FRED St Louis Fed

Charles Evans: Thoughts on Leadership and Monetary Policy: “Sometime during the gradual policy normalization process…

…inflation begins to rise too quickly. Well, we have the experience and the appropriate tools to deal with such an outcome. Given how slowly underlying inflation would likely move up from the current low levels, we probably could keep inflation in check with only moderate increases in interest rates relative to current forecasts. And given how gradual the projected rate increases are in the latest SEP, the concerns being voiced about the risks of rapid increases in policy rates if inflation were to pick up seem overblown.

Furthermore, as I just outlined, there is no problem in moderately overshooting 2 percent. After several years of inflation being too low, a modest overshoot simply would be a natural manifestation of the Federal Reserve’s symmetric inflation target. Moreover, such an outcome is not likely to raise the public’s long-term inflation expectations either — just look at how little these expectations appear to have moved with persistently low inflation readings over the past several years. So, I see the costs of dealing with the emergence of unexpected inflation pressures as being manageable.

All told, I think the best policy is to take a very gradual approach to normalization. This would balance both the various risks to my projections for the economy’s most likely path and the costs that would be involved in mitigating those risks.”

Must-Read: Torsten Slok: DB: Expect More Hawkish Fedspeak

Must-Read: Remember, relative to Fed beliefs less than four years ago, we have already seen 75 basis points of tightening relative to the benchmark of the estimated natural rate:


The more likely it is that we are in a régime of secular stagnation, the more important it is to take the 2%/year inflation target as an average rather than a ceiling, and the less-wise is the Federal Reserve’s expressed commitment to start raining interest rates come hell or high water. The markets appear to think–quite reasonably–that the Federal Reserve is gradually moving month-by-month toward a more reality-based Larry Summers-like view of the macroeconomic situation, and that when December comes around the current FOMC consensus for raising interest rates then will have sublimed away.

And if the market is wrong, the most likely reason for it to be wrong is if the Federal Reserve decides to be contrary and to stop its ongoing rethinking process, just to show that it can and that it is boss…

Torsten Slok: DB: Expect More Hawkish Fedspeak: “Before Yellen’s speech last week, the probability of a rate hike by the end of 2015 was 42%…

…Today it is 41%. The market continues to believe that the Fed will not hike rates later this year despite 13 out of 17 FOMC members expecting a hike in 2015. Why does the market not believe the Fed? One reason is likely that the Fed for several years now has been too optimistic… has had to revise down their forecasts of not only near-term growth but also longer-term growth prospects…. This one-way revision in forecasts over many years has probably had an impact on how market participants interpret Fed communication…. We continue to expect a rate hike in December and we continue to expect Fedspeak in the coming weeks will repeat their expectation of liftoff coming in 2015..

Must-Read: Scott Sumner: The Case for Tightening Is Getting Weaker and Weaker

Graph 10 Year Breakeven Inflation Rate FRED St Louis Fed

Scott Sumner: The Case for Tightening Is Getting Weaker and Weaker: “The recent plunge in TIPS spreads is reaching frightening proportions…

…5 year = 1.09%. 10 year = 1.42%. 30 year = 1.61%. Yes, I know they can be distorted by illiquidity, but they are not THAT far off market expectations. And don’t forget they predict CPI inflation, which runs about 0.3% above the Fed’s preferred PCE. In essence, the Fed has a 2.3% inflation target. They aren’t likely to hit it. Also recall that since 2007 the Fed’s been consistently overly optimistic… markets have been more pessimistic, and more accurate. Also recall that Fed policy has a big impact on the global economy. Also recall that the global economy seems to be moving into a disinflationary cycle…. Given there is basically no upside from tightening now, the Fed’s got to ask itself one question: “Do I feel lucky today?”

Nothing new under the labor market sun

The Bureau of Labor Statistics released new labor market data today showing that the U.S. economy added 209,000 jobs and that the unemployed rate ticked up slightly to 6.2 percent. Overall, the data show an economy continuing on its path of the past several years—a moderate recovery that is inadequate in light of the severity of job losses during the Great Recession.

The slight increase in the unemployment rate was due to an increase in the labor force and not a decline in the number of employed workers. According to the BLS household survey, the number of employed workers increased by 131,000 while the overall labor force increased by 329,000. This resulted in an increase in the labor-force participation rate to 62.9 percent in July from 62.8 percent in June.

The share of the population with a job, the employment-to-population ratio, was unchanged from 59 percent, still 4 percentage points below the most recent peak in December 2006. The ratio for the working age population (workers ages 25 to 54) slightly decreased to 76.6 percent from 76.7 percent.

The number of long-term unemployed workers (those without a job for 27 weeks or more) was essentially unchanged, according to BLS. This group continues to be a large share of the unemployed at 32.9 percent of all unemployed workers. The debate about the future of the long-term unemployed will continue. Some analysts, including economists at the Board of Governors of the Federal Reserve, claim that the long-term unemployed are getting jobs while others remain quite skeptical of the evidence.

Businesses added 209,000 total jobs during July, 198,000 coming from the private sector. The employment gains were less broadly based than in recent months. The diffusion index for private industries, a measure of how many industries added jobs, was only 61.9 percent in July compared to 65.3 percent in June and 64.4 percent in May.

Manufacturing added 28,000 jobs, and all of the gains (30,000) came from industries that manufacture durable goods. Specifically, 14,600 jobs came from the auto industry. Nondurable manufacturing industries shed 2,000 jobs in July led by food manufacturing (a loss of 3,600 jobs).

The data on wage growth, relevant to the current debate about slack in the labor market and the future of Federal Reserve policy, also showed little change. The year-on-year change in the average wage for all workers was 2 percent. Wage growth has hovered around this rate for the last year and shows no sign of acceleration. And the rate is well below its pre-recession level in 2007, which was closer to 3.5 percent.


The data released today show a labor market that continues to heal from the Great Recession. But the recovery continues to come up short given the damage done in the past. With wage growth still subdued and no sign that the long-term unemployed are locked out from jobs gains, policy makers should be skeptical of calls to pull back on growth-boosting measures. Overly cautious policy would not only leave our economy weaker in the short run but undermine our long-term economic growth potential as well.