Fed Shouldn’t Raise Rates Yet Because Job Market Still Ailing – Real Time Economics

The Federal Reserve should be very cautious about raising interest rates just because the headline unemployment rate is falling, according to new research from two former central bank officials who are concerned the often-cited figure vastly overstates improvements in the job market.

David Blanchflower, a Dartmouth College economics professor and former member of the Bank of England’s monetary policy committee, teams up with Andrew Levin, an ex-Fed board economist now at the International Monetary Fund, to argue that the U.S. employment outlook is much weaker than indicated by the 5.5% jobless rate registered in February.

“Underemployment and hidden unemployment currently account for the bulk of the U.S. employment gap,” which the authors estimate to be around 3.3 million jobs when new entrants into the labor market are included.

Blanchflower & Levin

This underlying weakness helps explain what many officials cite as a puzzle: why U.S. wage growth has remained anemic despite steady employment gains averaging close to 300,000 a month and a fairly steep decline in the unemployment rate, which hit a recent peak of 10% in late 2009.

“Recent data on U.S. nominal wage growth is fully consistent with our assessment that labor market slack remains substantial,” they write in the paper, which will be presented next week at an economics conference sponsored by the Center on Budget and Policy Priorities.

Their research is the latest in a string of papers attempting to counter the growing momentum at the Fed in favor of raising interest rates at some point this year, despite lingering uncertainty about growth and inflation undershooting the central bank’s 2% target.

The Wall Street Journal

They include a paper from Chicago Fed President Charles Evans and his staffers, who say the risks of raising rates too soon are far greater than the threat of waiting too long.

 


 


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26 March 2015 | 5:43 pm – Source: blogs.wsj.com

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