A very decent jobs report today says the economy added 203,000 jobs in the month of November and revised the previous data up slightly. The unemployment rate as measured by the household survey has fallen to seven percent. And this month it fell despite an increase in the size of the labor force. Steady growth, continuous improvement.
Naturally this is going to heighten “taper” fever as Fed watchers (and FOMC members) with itchy trigger fingers have a palpable yearning for a return to normalcy. But I think it’s quite important at this time in American history for the central bank, not to regard itself as the institution whose job it is to take the punch bowl away before the party gets started.
One reason for that is fiscal policy. The nature of the deadlock in congress is driving us toward more austere policies. Even the negotiations around sequestration are all about replacing it with other kinds of spending cuts or revenue-raisers. Nobody is talking about doing anything to increase the budget deficit. When that’s the case, there’s much less need for a bunch bowl watchdog.
But the more important reason is the longer term context. The idea of a central bank whose main job is to take the punch bowl away before the party gets too fun belongs to a time of moderate macroeconomic fluctuations. If it’s been a long time since you’ve had a prolonged or serious recession, then it makes a ton of sense to become very vigilant about inflation—even “incipient” or largely hypothetical inflation. But when you had a year of recession (2008) followed by a year of extreme recession (2009) followed by a year of slow growth in which unemployment remained high (2010) followed by another year of slow growth in which unemployment remained high (2011) followed by another year of slow growth in which unemployment remained high (2012) followed by a fourth year of slow growth in which unemployment remained high (2013) it would be very unbalanced to act hyper-vigilant about inflation. It’s been a long time since the bulk of workers have had any meaningful bargaining power, and the wise thing to say would be that, yes, we would in fact actually like to see a party get started here.