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Highlights:
Chair Powell is recognizing that the Fed can shape labor market outcomes over the longer-run. That is a big deal.
This is a serious departure from the orthodox view of his predecessors: that the Fed can't affect the labor market over the longer-run, only inflation
Chair Powell is recognizing that the Fed can shape labor market outcomes over the longer-run. That is a big deal.
This is a serious departure from the orthodox view of his predecessors: that the Fed can't affect the labor market over the longer-run, only inflation
Chair Bernanke is seen as an ambitious dove but even he state to Congress that:
“Monetary policy — as a general rule — cannot influence the long-run level of employment or unemployment. And that’s certainly correct. What we are trying to address is the short run cyclical gap.”
“Monetary policy — as a general rule — cannot influence the long-run level of employment or unemployment. And that’s certainly correct. What we are trying to address is the short run cyclical gap.”
A sustained expansion & a tighter labor mkt can broaden employment gains and help lower-income communities overcome persistent economic barriers.
Powell: "With this tight labor market, employers are waving issues that might have prevented people from being in the work force.”
Powell: "With this tight labor market, employers are waving issues that might have prevented people from being in the work force.”
This really shouldn't be such a radical idea when you consider that FOMC members' perceptions of what's possible for the labor market over the longer-run seem directly related to the present state of the labor market (even if they're not supposed to be). 
It should no longer be so controversial to say that the Fed's ability to signal a more dovish policy path can affect the growth outlook thru financial conditions.
When the expansion was on thin ice at several points, the Fed has helped by intervening dovishly
When the expansion was on thin ice at several points, the Fed has helped by intervening dovishly
Chair Powell is working with a different set of insights than his predecessors about the nature of the labor market.
Those insights now require a fundamentally different reaction function, one that is not centered around constraining the unemployment rate to its "natural rate"
Those insights now require a fundamentally different reaction function, one that is not centered around constraining the unemployment rate to its "natural rate"
The current context requires the Fed to be willing to ease sufficiently in response to signs of weak employment and wage growth (e.g. #FloorGLI)
Waiting for signs of a rising unemployment rate is a recipe for doing too little too late, especially given the proximity to the ZLB
Waiting for signs of a rising unemployment rate is a recipe for doing too little too late, especially given the proximity to the ZLB
All of this is to say that the stakes are clearly higher now.
The July cut was a start, but the Fed now needs to update its reaction function to reflect the full set of benefits that stem from a tighter labor market and the costs of this expansion potentially ending. (end)
The July cut was a start, but the Fed now needs to update its reaction function to reflect the full set of benefits that stem from a tighter labor market and the costs of this expansion potentially ending. (end)
