Ann Saphir contributed to this post
The apparent conclusion from one of the most dovish regional Federal Reserve banks was rather surprising: The economy may actually need much smaller monthly job growth, of around 80,000 or less, in coming years in order for the jobless rate to keep moving lower. The immediate policy implication, it might seem, is that the U.S. central bank may have to tighten monetary policy much sooner than previously thought.
Andrew Brenner of National Alliance remarked that, while the report should be taken with a grain of salt, “this translates to lowering the bar to QE tapering.”
Right? Not necessarily, writes Goldman Sachs economist Jan Hatzius. Here’s why:
This estimate has raised questions whether the unemployment rate could fall faster than generally believed, and whether the first hike in the funds rate could therefore occur earlier than currently predicted.
But it is important to keep in mind that the Chicago Fed economists base their 80,000 estimate on the change in the trend participation rate. This is not a technical detail. If the actual participation rate is currently below trend but is likely to converge to trend over time, the pace of job growth will need to be materially above 80,000 per month to keep the unemployment rate stable, at least over the next few years.