Last week, in a mildly dovish statement, the Federal Reserve (Fed) continued to delay normalizing rates, citing inflation concerns and “global economic and financial developments” in explaining its rationale.
Ironically, having largely achieved its domestic employment objectives, the Fed is now at least partly focusing on exogenous factors to justify the continuation of excessively easy policy, waiting for “ideal” conditions that in practical reality may never arrive.
Indeed, in remarks this week, while Fed Chair Janet Yellen said she anticipates a rate increase later this year, she also said it’s unclear how fast “headwinds still restraining the domestic economy” will fade. While the Fed waits, liftoff remains long past due. It’s important to remember that rate normalization, when it eventually does come, will be very deliberate and gradual; we’ll merely be moving from “emergency” to “extremely-easy” monetary policy.
In my opinion, “extremely-easy” monetary policy would be a more appropriate stance for today’s U.S. economy, which is operating at a high level in a world of moderate global growth. Indeed, numerous signs suggest that, despite recent financial market volatility, the U.S. economic recovery is in solid shape and looks to be ready for liftoff. The sign I like best: The Beveridge Curve.
In many respects, I believe the jobs market best reflects the strength in the U.S. economy. The U.S. Beveridge Curve maps jobs openings against the unemployment rate to gauge the state of the labor market. With the unemployment rate dropping to 5.1 percent in August, and the Job Openings and Labor Turnover Survey (JOLTS) improving sharply in July, the U.S. Beveridge Curve is now at its strongest point since the recession, as the red dot in the figure below shows.
U.S. Beveridge Curve at Post-Recession High
To be sure, there still are some pockets of slack in the labor force, as well as areas where technological disruptions are causing stresses for workers. But the Fed’s monetary policy rate tools are unlikely to be of use to address these problems. Fiscal policies are needed there. In the meantime, the curve above shows a labor market at a high vacancy-low unemployment level typically associated with economic expansions, meaning the Fed’s dual mandate has been achieved without a doubt.
The economy’s relative strength, meanwhile, can also be seen in many other areas such as the household net-worth-to-debt ratio, which today resides near previous peak levels, as Bloomberg data shows.
Looking forward, the U.S. economy should maintain a durable (yet modest) growth trajectory for years to come. Consumption should be helped by the tailwind of lower oil prices and by persistently solid jobs growth, as well as by the aggregate income gain that accompanies these new jobs. Further, it’s likely that average levels of wage growth will begin to improve from here, as labor market slack dissipates.
In short, I believe focusing on international developments that the U.S. economy can handle well is misguided. I’ve called for the Fed to move for a long time, and I continue to believe that the U.S. economy will likely weather a rate regime change well and over time may even benefit from a modestly higher (and more normal) rates. Until then, one has to wonder whether the Fed may be missing its window of opportunity for normalizing rates.