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When Should the Fed pull back Support of the Economy?

December 16, 2013

“The economic debate in 2013 was dominated by discussions of when the Federal Reserve should begin pulling back on support to the economy.” – Ryan Avent

The above quote took me quite by surprise. I guess I’ve been out of the loop too long. To me it just seems obvious looking at the data that the economy is still in the stagnant funk which started in 2008.

To answer the title question, I would say when either unemployment is lower than 5% or when inflation is higher than 4%. If you want to measure things in NGDP, when average NGDP growth surpases 5% over a three year period or something like that.

core CPI

Nope. Not even close. In fact, core inflation is at 1.7% and falling. Looks like the Fed needs to hit the gas just to manage to get to its 2% informal target, let alone get near “catch up” inflation for all the deflation we had back during the height of the crisis. How about employment? That looking any better?

unemployment rate

Oh wow, look at that! Sure, it’s not great by historical standards, but look how many fewer unemployed there are. Maybe the unemployment problem is doing fine and doesn’t need any more Fed support. I wonder what happened to all those unemployed people?

employment to population ratio

Oh. Well then. That’s depressing. I guess all those people who left the ranks of the ranks of the unemployed didn’t find jobs, they just gave up looking for jobs entirely and are now considered “out of the labor force”. What about NGDP? Maybe if we use that wacky new indicator Scott Sumner is always talking about?


Meh, at least it’s not negative anymore, I suppose.

So the answer to the question is: Not this year. Probably not next year either. At this rate, it will be a long time before the Fed is “too expansionary”.

Bonus Unemployment Graph:

Footnote: If you think that monetary policy is something that can be “exited from” or “turned off”, you don’t understand how macroeconomics works.

Further reading:
Sumner on the stance of macro policy.

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