In a recent Financial Times article, Faust notes:
[A] growing chorus of voices as diverse as Donald Trump, the Republican candidate for the presidency, and Martin Feldstein, former chief economic adviser to president Ronald Reagan, and now a professor at Harvard, are demanding that the Federal Reserve aggressively tighten monetary policy. Mr Trump’s reasoning is hard to discern, but Mr Feldstein makes a traditional case for why job gains have become a dangerous thing. With the overall unemployment rate near the historically low level of 5 per cent, the argument goes, job growth must slow lest the labour market get too tight and prompt a surge in wage and price inflation. According to the Fed’s minutes, some version of this argument has considerable support among the central bank’s policymakers.
The very strong case against this position is just one manifestation of a point we’ve been arguing for some time. In Six Degrees of Separation, we labelled this a policy of preemptive unemployment and argued that nobody understands the jobs-inflation link well enough to justify preemptive unemployment at the current time. Reflecting on employment trends over the past year provides a potent and unsettling illustration of our point.
Six degrees of separation over the last four quarters
Over the four quarters ending in September 2015, job gains averaged about 200,000 per month—a bit more in the establishment survey, a bit less in the household survey. With the labor force rising by only about 50,000 per month, the jobless rate fell from 6.1 percent to 5.2 percent.
|average monthly gains (thousands)||unemployment|
|period||payrolls||household empl.||labor force||rate change (%)|
|2014:Q3–2015:Q3||236||176||52||6.1 to 5.2|
|2015:Q3–2016:Q3||203||213||194||5.2 to 4.9|