The Fed Is Taking A Huge Risk By Cherry-Picking Indicators

The Federal Reserve has a dual mandate it relies on to guide monetary policy: maximum employment and stable prices.

Regarding employment, it has become less and less clear exactly how the Fed measures employment when it considers its policy goals.

On Wednesday, we learned that the unemployment rate has become a less important measure to the Fed when it said, “Labour market conditions improved, with the unemployment rate declining further. However, a range of labour market indicators suggests that there remains significant underutilization of labour resources.”

In other words, it’s not just about unemployment rates and jobs created. The Fed cares about other measures like labour force participation rates, job openings, quit rates, etc.

For some economists, it seems that Fed Chair Yellen and her colleagues may be ignoring important signs of job growth and inflation, which could put them behind the curve.

ECI. Slok points to.

“The FOMC may see a significant underutilization in the labour market but the reality is that momentum is stronger than in 2005-2006, see chart below,” said Deutsche Bank’s Torsten Slok. “By referring to “a range of labour market indicators” It seems to me that the Fed can now cherry-pick its labour market indicators to remain dovish. This may be a bit risky given that the chart below suggests that one of the indicators they have looked at previously is the broader labour market momentum.”

As you can see, the Fed’s interest rate target historically moves with job creation. That hasn’t been happening in the current cycle.

This could set us up for problems like surging inflation.

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