Those urging the Federal Reserve to delay include those who believe the economy is too fragile to withstand any increase in rates, and that our more vulnerable workers will take the hit, and those who believe the stock-market will be in for a fall.
We’ve argued the weak wage case repeatedly, and will spare you a recap. Some of our most respected analysts argue that wage increases are a late-cycle rear-view mirror phenomenon in an ordinary cycle, and we agree. But our own analysis of the current recovery suggests that the labor market will take a while more to follow historical metrics. We will cite, however, a recent paper by former Bank of England advisor and Dartmouth professor (among other things) David Blanchflower and Andrew Levin, currently at the IMF but moving to Dartmouth in the fall, in which they publish some new results on underemployment and wages drawn from state-level data. In a nutshell, they find that a decrease in broadly measured labor-market slack does not increase wage pressure if the level of slack remains high, and assert that starting the tightening process would be premature, and should be held off until labor market slack decreases significantly and inflation comes closer to the FOMC’s goal of 2 percent.
Considering its recent performance (see below), if the stock market can’t withstand up to a 1% increase in the policy rate, we’d better find that out.
The environment of super-low rates and high liquidity has encouraged all kinds of financial machinations. The withdrawal of that indulgence, we hope, will encourage economic actors to focus on more productive long-term activity. We suspect that a move from abnormally low rates to still very low rates won't derail the welcome increase in capital spending we have seen recently.
We support concern about the effect the first move may have on the improving job market–it still has a way to go. A recent SF Fed piece suggests a few more years to true health. That makes it a real shame that there's little possibility of a productive fiscal compromise: a focused business and low-inflation friendly infrastructure/retrofitting project that could offset the potential pressure on our workforce as rate increases turn the corner. Not to mention some relief from the ever increasing flat tire rate caused by old degraded roadways.
