For reasons that are a bit unknown to me there was a surge of enthusiasm this week about the likely state of the American labor market, a surge that’s been popped by today’s mildly disappointing jobs report that shows a continuation of the long-term trend of slow employment growth and barely-there healing of the labor market.
One would hope that this will remind members of the Federal Reserve’s Open Market Committee that their months-long dance around the idea of reducing the pace of Quantitative Easing is nuts, was always nuts, and continues to be totally nuts. Real output is weak, has been weak, and shows every sign of continuing to be weak. The labor market recovery is weak, has been weak, and shows every sign of continuing to be weak. Declining labor force participation, stubborn long-term unemployment, and chronic underinvestment by corporate America do permanent and irreparable harm to America’s potential for long-term growth. By all means implement tighter monetary policy if that’s necessary to prevent inflation from spiraling out of control. But there is no sign whatsoever of any such inflationary spiral.
Monetary policymakers need to stop looking for the exits and seizing on any random bits of good news as a reason for tighter policy. You need to keep easing until really bad news about inflation starts to loom larger than continuing bad news about jobs.