THOSE hoping for an end to the suspense will be disappointed. America’s labour market update—the last before the Federal Reserve’s meeting on September 17th—did not provide much clarity about the chance of an imminent rise in interest rates. For months, Fed officials have emphasized that their decision on when to raise rates will depend on the data. But with no further major data releases before the meeting, the outcome remains a cliffhanger.
Employers added 173,000 workers to their payrolls in August; below the average of 247,000 for the preceding year, but enough to bring unemployment down to 5.1% from 5.3%. Joblessness is now roughly at the Fed’s estimate of its so-called natural rate, which stands at 5%-5.2%. If unemployment falls much further, the Fed’s models predict that wage growth and inflation will accelerate. As a result, the Fed’s hawks will argue at the September meeting that it is time to see off the coming inflationary surge by raising rates.
But what if these forecasts are wrong? There are two key sources of uncertainty. The first is Fed’s estimate of equilibrium unemployment . A recent note by Andrew Figura and David Ratner, two Fed researchers, floats...Continue reading
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