The unemployment rate in the U. S. decreased to 5.30 percent in June of 2015, lowest since it peaked at 10 percent in November 2009. The unemployment rate has since dropped at a rate of 0.85 percentage a year almost linearly with the help of the central bank’s monetary stimulus. The unemployment rates have been favored by the fact that many people who lost their jobs have given up looking for jobs. The job market is expected to improve further in the next one or two years as more manufacturing is moving back to the U. S. from oversees and it could reach 4sh percent. Note that a record low unemployment rate is 2.5 percent in 1953 but an average in the past half century is at high 5sh percent.
“While the labor market has moved closer to the FOMC’s mandated goal of maximum employment, less progress has been made in moving inflation close to the FOMC’s longer-run objective of 2 percent …”, said Janet Yellen at a recent speech [1]. “Overall consumer price inflation has been close to zero over the past year, in large part because the big drop in crude oil prices since last summer has pushed down prices for gasoline and other consumer energy products.” The core inflation, which excludes the volatile categories of energy and food prices, is currently at annual rate of 1.2 percent, far below 2 percent target. I think the inflation in the U. S. will remain low and below target for quite some time. This is because first, the diverse course of monetary policies between the U. S. and the rest of the world will further strengthen U. S. dollar, thus making imported goods cheaper for the U. S. Second, the oil prices will remain suppressed thanks to the increasing oil and natural gas production in the U. S. The benefit of low oil prices is yet to be fully transmitted to the goods. The resolution of Iranian sanction is now on horizon, so more oil will come to the market. Third, there is little wage pressure despite of the reduction in unemployment rate.
Beside to maximize employment and to keep price stability, the Fed has taken partial responsibility to maintain financial stability. This is additional to the Fed since the 07/08 financial crisis. The recent turbulences in Greece has proved that the financial system in the world, especially in the U. S. has become much robust after yeas’ overhaul. There was literally no impact to the financial market in the U. S. at the event that Greece defaulted on the IMF loans on July 2.
So the Fed has only left some job to do with the price stability. Inflation is an expression of the value of time. Low inflation appears to be good for short term, but it depresses timing value of money in long term. Inflation is also a driving force of consumption and therefore of economic growth. For the Fed, increasing the interest rates too fast will worsen the inflation situation. In that sense, it is trustful that Fed will be careful when they raise the policy rates.
The current ultra low interest rates (at zero bound), however, has left the Fed without an important conventional monetary tool if some unknown events causing economic downtown. Therefore the Fed has a desire to regain the option by increasing the policy rates. Janet Yellen has been clear on it as well [1].
References:
[1] Janet Yellen, Recent developments and the outlook for the economy, speech at the City Club of Cleveland, Ohio, July 10, 2015