What should the Federal Reserve do?: The case for opportunistic inflation

Posted: December 6, 2014 in economy
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Sometime next year, the Federal Reserve will likely face an unusual confluence of economic circumstances. One of its mandates, full employment, will call for monetary policy to tighten relatively quickly; the other, inflation, will suggest it should stay loose. How should the Fed weigh these competing goals? It may want to dust off a doctrine from the 1990s, “opportunistic disinflation” and rechristen it “opportunistic inflation.”The impressive pace of job creation reported today underlined the approaching crunch point. The number of new non-farm jobs in November, at 321,000, was the most in nearly three years. Along with revisions of 44,000 to prior months, it shows this year’s already-solid pace is accelerating. The unemployment rate remained at 5.8%, but if this year’s combination of job and labour force growth continue, it will drop below 5% within a year, easily undershooting the Fed’s estimate of its natural rate. True, the current unemployment rate may overstate how strong the labuor market is, but other measures suggest slack is quickly disappearing: the broader U-6 measure of underemployment dropped to 11.4% in November, from 11.5%, long-term unemployment edged down to 1.8% from 1.9%, and involuntary part time work declined.But even as the Fed hits its full-employment target, it will be badly missing on its 2% inflation target – from below. Headline inflation …

via Economic Crisis http://ift.tt/1vUOXYp

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