Monday, August 25, 2014

Central Bankers Have Reached A New Consensus: Weak Labor Markets Are A Greater Problem Than Risk Of Inflation

The annual Federal Reserve meeting at Jackson Hole included central bankers from the UK, Japan and the EU.  They all agreed that weak labor markets were a problem despite declining unemployment rates.  They used to believe that falling unemployment rates led to a greater risk of inflation.  That is no longer true.  That is because wages should be rising as labor markets tighten.  Wage growth has been stagnant.  The unemployment rate is no longer an useful measure of inflation risk.  The Fed, for example, has developed a multi-factor measure of labor market strength that is more useful than the headline unemployment rate.  Central bankers are looking for more ways to improve the labor market.  Inflation risk has been put on the back burner.

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