(Bloomberg View) – The steady improvement of the U.S. economy has led many to conclude that the Federal Reserve should keep removing stimulus by resuming interest-rate increases this year. I disagree: With inflation pressures low, there's a lot more the Fed can and should do to get people back to work.
To understand my point, consider three charts. The first shows the share of people in their prime working years — age 25 to 54 — who have a job (focusing on this age group helps strip out the effect of the baby-boom generation reaching retirement age):
From 2007 to 2010, the employment-to-population ratio for this group fell sharply, from more than 80 percent to less than 75 percent. It remained low until 2014, leading some economists to speculate that the U.S. had reached a depressed "new normal" for employment. Over the past two and half years, though, it has risen sharply — offering hope that employment can recover after all.
Welcome as it is, the rate of improvement strikes me as slow. Even if the employment-to-population ratio increased by another two percentage points in the next thirty months, it would still remain below its 2007 level. This argues for more monetary stimulus to generate a faster improvement.
Granted, monetary stimulus is not costless. As the U.S. learned in the 1960s and 1970s, easy money can lead to an upward spiral of inflation and inflationary expectations, which would require painful measures to reverse.
But there are no troubling signs of inflation at the moment. Consider, for example, the annual increase in the Fed's preferred price measure over the past decade:
The Fed's goal is to keep inflation close to 2 percent. As the chart shows, it has been below that level since early 2012. The most significant breach, in 2011, occurred thanks to a temporary upward blip in oil prices. The "core" inflation measure, which strips out transitory and volatile movements in food and energy prices, has remained below 2 percent since late 2008, except for a few months in 2011-12.
The real problem in the 60s and 70s, however, was the upward drift in people's and businesses' inflation expectations, which tend to become self-fulfilling as companies raise prices and people demand higher wages to compensate .
