The dog still isn’t barking
I always try to find something interesting to say about the jobs report. The obvious headline was the 321,000 new jobs, plus an upward revision in previous months totaling another 44,000. The past three months are very strong. Hourly wages were up a strong 0.4%, but over the past 3 months, or 12 months, we are still seeing only about 2% trend wage growth–no real breakout yet.
In my view it’s the bond market that is the most interesting—the dog that isn’t barking. I’ve been talking about low interest rates being the “new normal” for quite some time, but I would have expected somewhat higher interest rates with this sort of strong jobs growth. The argument that the Fed is artificially holding down bond yields no longer holds, for two reasons; QE has ended, and more importantly TIPS spreads have been falling. They are only 1.74% on the 10 year, and 1.98% on the 30-year. The 10 year yield of 2.26% really drives home the point that low rates are the new normal. People at the Fed think they’ll be “normalizing” rates at about 4% a few years down the road. That now seems like a pipe dream. The old rules no longer apply.
A trend wage growth of 2% isn’t enough to get you 2% trend inflation, because while productivity growth has been slowing, it’s not zero. The Fed is a long way from achieving a 2% trend rate of inflation.
What does this say about current monetary policy? Just what I have been saying for months—we don’t know if it’s too easy or too tight until we are told the Fed’s objective–in clear, easy to verify terms. Many of the conservatives at the Fed would prefer they simply focus like a laser on 2% inflation, and ignore unemployment. For that group (assuming they are intellectually honest) money is clearly too tight right now. It’s not even debatable. For the dual mandate doves like Yellen, things are less clear. If the goal is 3% NGDP growth long term, then money may well be too easy. If it’s 5% trend NGDP growth, then money is too tight. If it’s 4%, then perhaps the Fed is close to being on target. The Fed won’t tell us what outcome they think would be desirable, in terms of a single number that is a weighted average of its dual policy goals.
Then why was I able to say money was unambiguously too tight for so many years? Because it was too tight in terms of any plausible Fed goal. That’s no longer true.
PS. If my comment on the hawks and doves didn’t startle you, read it again—you weren’t paying close enough attention.
PPS. I have a new post at Econlog, on the 1921 depression.
Update: Greg Ip has a post speculating that the Fed may engage once again in “opportunistic disinflation,” only in the opposite direction:
Two decades ago, inflation was above any reasonable definition of price stability. In contemplating how to get it lower, Fed officials came up with the moniker of “opportunistic disinflation.” The Fed would not deliberately push the economy into recession, but it would exploit the inevitable recessions and resulting output gaps that came along to nudge inflation closer to target. In 1996 then governor Laurence Meyer defined it thus:
Under this strategy, once inflation becomes modest, as today, Federal Reserve policy in the near term focuses on sustaining trend growth at full employment at the prevailing inflation rate. At this point the short-run priorities are twofold: sustaining the expansion and preventing an acceleration of inflation. This is, nevertheless, a strategy for disinflation because it takes advantage of the opportunity of inevitable recessions and potential positive supply shocks to ratchet down inflation over time.
Of course positive supply shocks are a fine time to engage in disinflation, but recessions are the worst possible time. That didn’t stop the Fed from engaging in disinflation in the 1991, 2001, and 2009 recessions. It’s a procyclical policy, which makes the business cycle worse. Let’s hope they don’t use the next boom as an “opportunity” to raise inflation, and then the inevitable recession that follows as an opportunity to reduce it.