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 bevery 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