A genuinely good employment report this morning — adding jobs like it’s 1999, and some actual wage growth, finally.
But — you knew there would be a but — good news can turn into bad news if it encourages complacency.
There will, predictably, be calls to respond to the good news by normalizing monetary policy, raising interest rates soon. And we will want to raise rates off zero at some point. But it’s important to say that (a) we are still highly uncertain about the underlying strength of the economy (b) the risks remain very asymmetric, with much more danger from tightening too soon than from tightening too late.
On (a), the uncertainty comes in several dimensions. We don’t know how long the good news on jobs will continue; we don’t know how far we are from full employment; we don’t know how high interest rates should go even when we do get to full employment.
On (b), we know how to deal with above-target inflation; it’s a problem, but not a trap. But if you get into a trap like Japan’s, or that which the euro area already seems to be in, getting out is very hard. You really don’t want to risk tightening too soon, and finding yourself desperately trying to get traction in a zero-rate environment.
One related point: there may be some tendency to say that things are really good, because we can count on falling oil prices to give the economy a big boost. But as I suggested yesterday, that’s not as clear as you might think. And I was happy to see the much more detailed analysis from Dave Altig at the Atlanta Fed making basically the same point. Once you take into account the effects of falling oil prices on energy investment, the stimulative effects of the fall look weaker, maybe even nonexistent.
So still: the Fed should wait until it sees the whites of inflation’s eyes — and by inflation I mean inflation clearly above 2 percent, and if I had my way higher than that.