Grand Central: Fed Eyes Significant Underutilization of Labor Resources – Real Time Economics

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HILSENRATH’S TAKE: FED EYES SIGNIFICANT UNDERUTILIZATION OF LABOR RESOURCES

The Federal Reserve said in its July policy statement that officials saw “significant underutilization of labor resources.” The unemployment rate at the time was 6.1%. The number of Americans working part-time who wanted full-time work was 7.5 million. A broader “U6″ measure of unemployment that included part-time, marginally attached and discouraged workers was 12.1%. Average hourly earnings were up 1.9% from a year earlier.

This matters because well before the Fed moves toward raising short-term interest rates, officials will make a determination that the labor market is no longer burdened by “significant underutilization” of resources. To make that determination, the jobless rate, U6, part-time employment, wages and other measures need to improve relative to where they were in July when the Fed made its last statement.

Fed officials are likely to engage in a lively debate at their Sept. 16-17 policy meeting about whether their assessment of labor slack still stands. Where they come down will depend in large part on the data released by the Labor Department Friday. To move from their July stance, Fed officials will likely need to see more than a small improvement in these indicators.

-By Jon Hilsenrath

MORNING MINUTES: KEY DEVELOPMENTS AROUND THE WORLD

ECB Surprises With Rate Cuts, Asset Purchase Programs. The European Central Bank surprised financial markets with a cut in interest rates and new stimulus plans despite opposition from Germany’s powerful central bank, underscoring its urgency in keeping too-low inflation from derailing the eurozone’s weak economy.The decisions highlighted the increasingly diverging paths between central banks in the U.S. and U.K., which are eyeing tighter policies, and the ECB and other central banks in Continental Europe that are ramping up their stimulus efforts.

More from the ECB:

– European shares on Friday retraced some of Thursday’s strong rally, which was triggered by the European Central Bank’s decision to cut rates and introduce a further set of measures to combat low inflation and stimulate anemic economic growth. The euro, which hit a low of $1.2920 and recorded its largest single-day net decline against the U.S. dollar since November 2011 on Thursday, recouped marginally on Friday but remained firmly below the $1.30 mark.

– Does the ECB’s new stimulus amount to QE? 

-Read Mr. Draghi’s prepared remarks.

Five takeaways from the meeting.

Analyst reaction.

-ICYMI: Re-live Mr. Draghi’s eventful press conference via our (no longer) live blog recap:

Fed: Gap Between Rich, Poor Americans Widened During Recovery. The gap between the richest and poorest Americans widened in recent years, the Federal Reserve said Thursday. Average pretax income for the wealthiest 10% of U.S. families rose 10% in 2013 from 2010, but families in the bottom 40% saw their average inflation-adjusted income decline over that period, according to the Fed’s Survey of Consumer Finances, which is conducted every three years.

Mester Says Fed Needs to Clearly Tie Rate Increases to Data. Cleveland Fed President Loretta Mester said Thursday in her first official speech that she wants the central bank to make clearer that the timing and pace of future interest-rate increases will be driven by how the economy is performing.

Fed’s Powell: Fed May ‘Move Faster’ On Rate Hikes If It Sees Strong Job, GDP Growth.Federal Reserve governor Jerome Powell said the central could move sooner than expected to raise interest rates it continues to see strong job gains and economic growth. “If we continue to see strengthening payroll, [gross domestic product], employment, then we’ll move faster. If it goes the other way and things weaken, it’ll be slower,” Mr. Powell said Thursday in answer to audience questions following a speech in New York.

Fed’s Fisher Says Economic Figures Suggest U.S. Recovery Is Strengthening. Recent economic data suggest the recovery is strengthening and the U.S. inflation rate may be running closer to the Federal Reserve‘s targets than is immediately obvious, Dallas Fed President Richard Fisher said Thursday. While acknowledging that recent consumer-inflation data were softer than in prior months, Mr. Fisher said underlying trends remained inflationary, according to a remarks prepared for delivery to the U.S.-India Chamber of Commerce and S. Jaishankar, the Indian ambassador to the U.S. in Dallas.

U.S. Needs Lower Rates, More Inflation: Fed’s Kocherlakota. The Federal Reserve has consistently fallen short of its inflation and employment goals, suggesting U.S. borrowing costs remain too high and the country still isn’t making full use of its productive resources, a top central bank official said late Thursday.

Fed Adjusts Tool for Liquidity Withdrawal. The Fed is testing some changes to one of the tools it intends to use to raise interest rates. The so-called term deposit facility (TDF) might play an auxiliary role in the process. The Fed said Thursday it was testing a new version of the facility that allows for early withdrawals, at a penalty.

Five Things to Watch in Friday’s Jobs Report. The Labor Department’s initial estimate of August job growth on Friday is expected to show another solid month of hiring.

FSOC Proposes Naming MetLife as ‘Systemically Important’. U.S. regulators on Thursday voted to propose naming MetLife Inc. as a “systemically important financial institution,” a designation that would mean tougher regulation and oversight by the central bank. Members of the Financial Stability Oversight Council, which includes the Fed, voted unanimously in favor of proposing the designation of a nonbank financial firm.

BOJ Kuroda Voices Support for Weaker Yen. Talking directly about the currency market isn’t usual for major central bank chiefs. But Bank of Japan Gov. Haruhiko Kuroda on Thursday spoke in support of a stronger U.S. dollar and a weaker yen.

BOE Rate Message Getting Through, Slowly. Almost half of British households expect an increase in interest rates within the next 12 months, up from a third last summer, according to a Bank of England survey Friday, a sign that near-constant chatter in the press about higher mortgage payments is slowly filtering through. 

Poloz Makes His Mark in Shift on Rate-Hike Signals. Around this time last year, many analysts expected Canada’s central bank to start hiking interest rates before the Fed. Now, they are predicting the Bank of Canada will instead trail the Fed, a shift some say has much to do with the man at the institution’s helm.

Bank of Canada May Delay Rate Hikes if Europe Falters. The Bank of Canada’s neutral stance on the direction of interest rates could be in place for a while if the latest efforts to stimulate the European economy fail to bear fruit. 

Bank of Russia Sees No Risks to Financial Stability From Ruble Weakening. The Bank of Russia sees no risks to the country’s financial stability from the ruble’s weakening and is sticking to its plan of letting the currency float freely next year, the central bank’s first deputy chairwoman said Friday. The ruble hit record lows earlier this week, pressured by geopolitical tensions in Ukraine and the possibility the West may impose new sanctions against Moscow. The central bank didn’t intervene in the currency market through sales of foreign currency to limit the ruble’s depreciation – Dow Jones Newswires.

Philippines Central Bank: Aug CPI a Factor in Next Policy Decision. The Philippine central bank said Friday that the still-elevated inflation in August along with actions of monetary authorities in developed countries will be taken into consideration when it meets next week to determine whether further policy tightening is warranted – Dow Jones Newswires.

GRAPHIC CONTENT

Among 798 small private firms with less than $20 million in revenue, 51% said in August that they planned to increase their capital outlays in the next 12 months. That is a record high, and it is also up from 42% a year ago, according to the survey by The Wall Street Journal and Vistage International, a San Diego executive-advisory group.

 

FORWARD GUIDANCE

FRIDAY

-Boston Fed’s Rosengren speaks in Boston at 3:45 p.m. EDT

-Bank of Mexico releases a policy statement

SATURDAY

-Philadelphia Fed’s Plosser speaks on the economic outlook in Amelia Island, Fla., at 10:15 a.m. EDT

RESEARCH

Don’t Blame Shrinking Work Force Participation on Great Recession: Fed Paper. A decline in the share of Americans holding or seeking jobs is largely the product of longer-term factors such as a rising number of retirees rather than the aftermath of a particularly awful recession, economists at the Federal Reserve board say in a new paper.

Why Are Married Women Working So Much? The hours worked by married women has tripled in the last six decades, and the best explanation is a reduction in the gender wage gap, Larry E. Jones, Rodolfo E. Manuelli and Ellen R. McGrattan write in a newly revised paper from the Minneapolis Fed. “In our model, the presence of the gender wage gap causes married women to allocate a substantial fraction of their time to home production. Thus, even small changes in the female-male wage gap can generate large labor supply responses.”

COMMENTARY

The European Central Bank’s surprise package of stimulus measures announced Thursday is the institution’s most significant move since its efforts to end the currency area’s bond markets crisis in 2012, and another hard-won victory for Mario Draghi, writes Silvia Merler of the Bruegel think tank. “At stake was the credibility of Mario Draghi and the ability to push his Jackson Hole position through the Governing Council,” Ms. Merler writes. “The risk of betraying the exceptionally high expectations that he had created was not to be underestimated, but Mario Draghi eventually delivered, even though the actual size of the programme needs to be clarified. In a poker-like twist, he also made clear that it’s now the turn of European policymakers to meet his expectations.”

The concept of Gross National Happiness, pioneered by Bhutan, is a bad idea, Alan Beattie writes in the Financial Times. “One, Bhutan’s GNH, defined from the top by an autocratic monarch, was a deeply illiberal means of legitimizing undemocratic rule and failed utterly to prevent grotesque abuses of human rights. Two, it has distracted from much more constructive and democratic ideas of running countries in the interests of their citizens’ wider wellbeing.”

The real problem with wage growth might not be that it’s too slow, but “that wages didn’t fall enough during the recession,” an idea cited by no less than Fed Chairwoman Janet Yellen, Ylan Q. Mui writes on the Washington Post’s Wonkblog. “By leaving workers’ wages unchanged during the recession, businesses were essentially overpaying their employees. Once the recovery starts, they make up the difference the same way — keeping wages flat despite an improving economy.”

BASIS POINTS

-Brandeis University’s Catherine L. Mann was named Thursday by the Organization for Economic Cooperation and Development as its chief economist, becoming the first American to hold the post at an institution that was founded to help post-war Europe make the most of the Marshall Plan.

-Pickups in consumer spending and exports were offset by declines in investment spending and inventories to leave the eurozone’s economy stagnant in the second quarter, while an unusually large decline in construction also played its part.

-The U.S. trade gap narrowed in July, reflecting stronger demand for U.S. goods overseas that could boost the factory sector in the second half of the year.

-Comeos, a federation that represents Belgian supermarkets and retail chains, said prices in its stores have been falling for the first time since 1993. 

-Russian consumer price inflation accelerated in August following the country’s ban on food imports from Western countries.

-The value of Swiss foreign-currency reserves edged up to 453.8 billion Swiss francs ($487 billion) in August from CHF453.4 billion in July, central bank data showed Friday – Dow Jones Newswires.

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5 September 2014 | 11:04 am – Source: blogs.wsj.com

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