My latest column discusses the proper course of Fed policy now that the unemployment rate is below six percent. I argue that the Fed should continue to keep interest rates low due to the considerable slack that remains in the labor market.
We learned last Friday that in September the unemployment rate fell below 6 percent. This is, of course, good news. But “irrational exuberance” — to quote a former Federal Reserve chair — over the unemployment rate’s rapid decline may undermine the very recovery the Fed is trying to push forward. How so? By giving additional credence to the argument that the Fed should raise interest rates sooner and faster. It shouldn’t.
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The fundamental logic of monetary policy is the same as it’s been for years now: Prices aren’t rising as rapidly as the Fed would like them to, and the labor market isn’t using workers to their fullest extent. The Fed is still missing on both sides of its “dual mandate.”
Prudence thus dictates a patient return to normal monetary policy. And the unemployment rate falling below 6 percent shouldn’t fundamentally change anything.
You can read the column here.
— Michael R. Strain is a resident scholar and economist at the American Enterprise Institute. You can write to him on Twitter at twitter.com/MichaelRStrain.