What should the Federal Reserve do?: The case for opportunistic inflation

Sometime next year, the Federal Reserve will likely face an unusual confluence of economic circumstances. One of its mandates, full employment, will call for monetary policy to tighten relatively quickly; the other, inflation, will suggest it should stay loose. How should the Fed weigh these competing goals? It may want to dust off a doctrine from the 1990s, “opportunistic disinflation” and rechristen it “opportunistic inflation.”The impressive pace of job creation reported today underlined the approaching crunch point. The number of new non-farm jobs in November, at 321,000, was the most in nearly three years. Along with revisions of 44,000 to prior months, it shows this year’s already-solid pace is accelerating. The unemployment rate remained at 5.8%, but if this year’s combination of job and labour force growth continue, it will drop below 5% within a year, easily undershooting the Fed’s estimate of its natural rate. True, the current unemployment rate may overstate how strong the labuor market is, but other measures suggest slack is quickly disappearing: the broader U-6 measure of underemployment dropped to 11.4% in November, from 11.5%, long-term unemployment edged down to 1.8% from 1.9%, and involuntary part time work declined.But even as the Fed hits its full-employment target, it will be badly missing on its 2% inflation target – from below. Headline inflation …

Link to article: www.economist.com/blogs/freeexchange/2014/12/what-should-federal-reserve-do?fsrc=rss

Leave a Reply

Your email address will not be published. Required fields are marked *

Time limit is exhausted. Please reload the CAPTCHA.