Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities in Washington and a former chief economist to Vice President Joseph R. Biden Jr.
Today's Economist
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If any of the committee members or their staffs are reading this, I’d like to suggest a question for the new chief:
What data would prompt the Fed to slow or suspend its unwinding of monetary support?
It’s a question that touches on the two countervailing forces swirling around the Fed: one, to provide less monetary stimulus by unwinding its much-increased balance sheet and increasing the federal funds rate, and two, to be highly data-driven and apply more monetary stimulus to support the fits-and-starts recovery when it needs it, with a particular emphasis on labor market slack.
I’m not trying to be pushy here, nor to suggest it would be trivial to ease up on tapering based, for example, on some confusing incoming data. The deceleration in job growth over the last two months must give the Fed pause about its plan to reduce its bond-buying program by $10 billion per meeting. But considering other indicators — most notably the accelerated growth in real gross domestic product over the second half of last year — Ms. Yellen can certainly make the case that a few underwhelming job reports are not sufficient cause to change course. And surprising markets, which expect steady-as-she-goes on this stuff, would be a big deal, particularly for a new leader who wants to garner control over expectations.
Yet there’s that second force noted above: the pledge, which I take very seriously, that policies will be data-driven. That’s especially important when you consider how many times this economy in general and job market in particular have given us false hope, as green shoots turned brown before flowering.
So it’s important to push the Fed chief to articulate her thinking on the data considerations. It so happens, for example, that the unemployment rate is 6.6 percent, just below the 6.5 percent that the Fed has said is a benchmark at which it would begin to consider raising the federal funds rate. Based on the depressed labor force rate, I’m sure Fed economists see a higher number when they look at the unemployment rate — I’d argue something between one and two points higher (i.e., a more accurate measure of labor market slack is a few points above the actual jobless rate). But it would be useful to get that sort of thing on record so we’d have a better idea of what to expect, given incoming data.
For the record, I expect her answer to be something like “We’ll think about changing our tune on unwinding should it become abundantly clear to us that we’ve again overestimated the health of the near-term economy — i.e., when it’s clear that our growth forecasts are significantly overstated.”
The Fed’s most recent forecasts are basically for real growth in gross domestic product of about 3 percent this year, core inflation around 1.5 percent (both of these last two are from fourth quarter to fourth quarter), and unemployment (making some adjustment for the depressed labor force, I’d guess) ending the year around 6.5 percent. (Interestingly, of those forecasts, the one I’d say is most in trouble is the core inflation rate, which recently stuck closer to 1 percent than 1.5 percent.)
So as usual, there are lots of moving parts here, and I grant that the data bar for adjusting or changing course is high, as it should be. But maybe Ms. Yellen could say a bit about just how high it is.