Adam Ozimek: Wider Labor Market Slack Implies Lower Rates: "Focusing on wider labor slack helps explain why the Fed remains somewhat accommodative. It also suggests that if labor markets can return to 2001 levels, then rates should remain highly accommodative at the moment...

...Consistent with more hawkish commentators, the unemployment based rule suggests that the effect of labor markets now would be to push the federal funds rate slightly above neutral. However, focusing on prime non-employment suggests why the Fed remains accommodative: Ongoing slack continues to push the optimal funds rate down by around 2% compared with where it would be under full employment. What’s more, it is not clear that 2007 marks the best benchmark for full employment. The prime non-employment rate today remains significantly elevated compared with the early 2000s and is still improving quickly without generating above-target inflation. If we assume full employment is the rates from the end of the first quarter of 2001, the effects on the federal funds rate of wider slack are even more significant. In this case, unemployment is again slightly above neutral, while wider labor market slack is pushing the federal funds rate down 4 percentage points...


#shouldread
#monetarypolicy

Comments