Worthwhile Reads – September 26th

As the Federal Reserves moves to ending their QE program in October, Torsten Slok, chief international economist for Deutsche Bank AG, warns the Fed not to be too eager to raise rates. He warns that returning Fed policy back to a normal setting too fast will risk putting the economy into a recession.

Brad DeLong outlines what the FOMC in general is missing when making monetary policy. In his assessment the Fed should not be as eager to end unorthodox monetary policy as it would risk taking the path of Europe where there is a threat of deflation and short term interest rates are below zero. More importantly he points out that:

“Since 1979 the Federal Reserve has built up enormous credibility as the guardian of price stability and has wrecked whatever credibility it had as the guardian of low unemployment. A situation in which the general expectation is that the Federal Reserve will do too little to guard against high unemployment is worse than a situation in which the general expectations is that the Federal Reserve will too little to guard against inflation–’it is worse, in an impoverished world, to provoke unemployment than to disappoint the rentier’2.”

The Peterson Institute for International Economics had a conference on Wednesday discussing labor market slack where the working paper Wages and Labor Market Slack: Making the Dual Mandate Operational was presented. The paper looks at the accelerating decline in labor participation and wages stating that:

“In this paper we examine the impact of rises in inactivity on wages in the US economy and find evidence of a statistically significant negative effect. These nonparticipants exert additional downward pressure on wages over and above the impact of the unemployment rate itself. This pattern holds across recent decades in the US data, and the relationship strengthens in recent years when variation in participation increases. We also examine the impact of long-term unemployment on wages and find it has no different effect from that of short-term unemployment. Our analysis provides strong empirical support, we argue, for the assessment that continuing labor market slack is a key reason for the persistent shortfall in inflation relative to the Federal Open Market Committee’s (FOMC) 2 percent inflation goal. Further, we suggest our results point towards using wage inflation as an additional intermediate target for monetary policy by the FOMC.”

In other Fed news, two hawkish bank presidents are set to resign by next spring. Charles Plosser, president of the Philadelphia Federal Reserve Bank, announced that he will be stepping down in March and Richard Fisher, president of the Dallas Federal Reserve Bank, plans to resign by the end of April.

Yesterday an interesting chart was released by economist Pavlina Tcherneva in which she finds that top 10% of earners are receiving more of the income from economic recoveries since the end of WWII. What makes the chart astounding is that the current recovery has had the lower 90% losing income. She will be discussing the chart in detail this Saturday at the 12th  International Post Keynesian Conference in Kansas City, MO.

Finally, Ben Casselman at FiveThirtyEight, shows that data from the Census report titled Income and Poverty in the United States: 2013 has not changed the fact that the middle class hasn’t seen a raise of income in 15 years. His conclusion being:

“The picture painted by all these figures is the same: The middle class was struggling in the 2000s despite an economy that was, by conventional measures, strong. The recession turned stagnation into an outright decline, and the recovery has thus far been too weak to claw back much of what was lost.”

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