January 24, 2022

This Is a Tight Labor Market, Not a Loose One

But in terms of policy, this increasingly looks like an economy on the right track. The work of macroeconomic stabilization appears to be pretty much complete. At its coming policy meeting, the Federal Reserve will seriously consider winding down its program of bond-buying faster than planned, Chair Jerome Powell said this week,

Despite the soft job creation numbers, the overall November employment report appears to support those plans. Fed officials would like to see a stronger rebound in labor force participation, but that measure was at least heading the right direction in November. And ultimately it isn’t Fed policy that will decide whether, for example, a 62-year-old who left his job during the pandemic decides to start working again.

If anything, the new numbers support the idea that the Fed has found itself out of position, with a monetary policy that is looser than it should be at a time when the labor market is quite healthy and with inflation far above its target.

Consider this: In the last economic cycle, the Fed began tapering its bond purchases in December 2013, when the unemployment rate was 6.7 percent and inflation was coming in below the Fed’s 2 percent goal. This time, it began when the jobless rate was 4.2 percent and inflation was in the ballpark of 6 percent (November inflation numbers have not yet been released).

Even if you believe the Fed was too quick to tighten monetary policy in 2013 — and the sluggish recovery of the 2010s is evidence that it was — the contrast is striking. In that sense, a more aggressive tapering plan from the Fed will be an effort to adjust its policy stance with the facts on the ground without causing too much disruption to markets or the economy.

If the Fed succeeds, the economy will keep growing steadily and the labor market will continue its gradual improvement. But it’s worth noting just how rapid the improvement has already been. In February — a mere nine months ago — the Congressional Budget Office was forecasting the unemployment rate would be 5.3 percent in the current quarter. It has ended up a full percentage point below that level.

Ultimately, this has been a speedy labor market recovery, and one that appears to have more room to run. Policymakers have every reason to take the win and continue adjusting to that reality.

Article source: https://www.nytimes.com/2021/12/03/upshot/jobs-report-unemployment-falls.html

Speak Your Mind