Suspend interest rate hikes to help the labor force grow

The Fed has raised the federal funds rate eight times over the past three years, and inflation is now at the 2% target. A strict cap on inflation would justify preferential rate hikes to ensure that inflation does not rise higher. But the symmetrical goal gives the Federal Open Market Committee the opportunity to see how the economy evolves before determining whether further rate hikes are needed.

The FOMC should take this opportunity to pause. With a federal funds rate of between 2% and 2.25%, monetary policy is now almost neutral, neither stimulating nor restricting the economy. Pressing the brakes prematurely could dampen wage growth and prevent many Americans from participating in the economic recovery.

The Fed has always underestimated its 2% inflation target. Core inflation has averaged 1.6% over the past six years and reached the target only in March of this year. If inflation were to slightly exceed the target in the near term, the Fed would hardly need to react. If the 2% target is truly symmetrical, the Fed should be as tolerant to underlying inflation of 2.4% over six years as it does not. has been with its losses down over the last six years.

A pause on rate increases would allow the FOMC to obtain important information. Crucially, this would help determine how much time is left in the job market. In recent years, politicians have often thought that the United States had reached full employment, but they were surprised to see that Americans continued to enter the labor market en masse. In 2015, the FOMC estimated that unemployment could not be less than 5.1% without triggering inflation. His current estimate is 4.5%; the current unemployment rate has fallen to 3.7% and wage growth and inflation are still moderate.

And the formal unemployment rate only counts people actively looking for a job. According to another measure – the percentage of middle-aged Americans who have a job – nearly one million adults are still absent from the labor market compared to 2006, and over 2.5 million fewer are working through compared to 1999. How much more of these missing workers re-enter the workforce if wages have gone up? We do not know.

Considerable uncertainty also surrounds the long-term impact of the 2017 tax reduction. Lawyers argued that this would stimulate private sector investment, which would increase the capacity and productivity of the economy. US. If true, tax cuts should not lead to higher long-term inflation. Critics argue that the tax cut produces a Keynesian sugar spike, that modest growth rates will reappear once the peak is reached, and that taxpayers will remain with $ 1.8 trillion of additional debt. Who is right? It will take time to find out.

If consumers and investors believe that the economy is overheating and the increase in debt resulting from the tax cuts will lead to future price increases, inflation expectations should emerge. Yet inflation expectations in the next five to ten years do not seem to increase much.

If inflation or inflation expectations significantly exceed the Fed's target of 2%, the Fed should do everything in its power to control them. It was wrong to let inflation accelerate dramatically in the 1970s and the American people paid a heavy price in the form of a high unemployment rate and high rates of unemployment. very high interest. But until inflation or inflationary expectations become significantly higher, the Fed should allow the economy to continue to strengthen, so as to allow as many people as possible to do so. Americans to participate in the recovery.

Mr. Kashkari is Chairman of the US Federal Reserve Minneapolis and a member of the Federal Open Market Committee.