Last week’s jobless claims, released on Thursday morning, show that the labor market, long the bright spot of the economy, continues to be strong — but not quite as strong as it has been.
By Peter Martin
Thursday, November 12, 2015
Initial claims held steady at 276,000, still comfortably below the 300,000 that is widely seen as indicating health, but back–to-back weeks at this slightly elevated level compared to recent months sees the four-week moving average climb 5000 to 267,750. Still, this is similar to how things were looking a month ago, and the overall trend of a tight labour market remains intact.
With the unemployment rate edging down to 5.0% in October’s employment figures, there is a very strong argument to be made that the US economy has now reached what could be considered maximum employment, fulfilling one half of the Fed’s dual mandate (though the Fed does not specify a fixed goal for employment, unlike inflation which makes up the other half the dual mandate).
In a prepared remarks delivered today in Washington, St Louis Fed President James Bullard argued that both goals have been met and that it is time to start normalizing US monetary policy. Mr Bullard’s contends that inflation is artificially low because of ‘an outsized oil price shock’ and that the Dallas Fed’s trimmed mean PCE inflation rate (an alternative measure of core inflation, which excludes the most extreme price changes each month and has historically shown to measure core inflation better than the traditional ‘excluding food and energy’ method) has shown a modal average of 1.7% over the past four months for the annual change. As Mr Bullard points out, this is ‘Just 30 basis points below the FOMC’s inflation target of 2 percent’ and he claims that ‘By these measures, the Committee’s goals have been met.’ Mr Bullard went on to argue that the FOMC’s monetary policy is far from normal and that historically the Committee has acted to normalize policy substantially before goals have been reached. ‘There is no reason to continue to experiment with extreme policy settings.’
Mr BUllard makes a persuasive argument, though I think when it comes to inflation he is cherry picking the data a little to suit his case. Even using the Dallas Fed’s trimmed mean rate, if you look at the one-month, annualized rate (as opposed to the 12-month rate which has remained stable), inflation dipped heavily in the summer, a story that is being told by a wide selection of other inflation measures. Even accepting the measure he has chosen to focus on exclusively, inflation looks stable rather than in an upward trend and there is therefore a risk that a rate hike would disturb that equilibrium and send prices lower once more to end up with too-low inflation.
Oil inventory data from the Energy Department will be closely watched on Thursday. The American Petroleum Institute (API) earlier this week gauged US crude inventories as having risen 6.3 million barrels during last week, including a large build at the price-important oil hub at Cushing, Oklahoma, which has pressured the price of oil for the last couple of sessions. US crude oil futures have fallen more than 2% in early trading on Thursday, taking the price down to just under $43 a barrel. It will be interesting to see, therefore, whether the official data from the Energy Department confirms the API’s evaluation.
In turn, lower oil prices have dragged energy stocks lower and, to a lesser degree, the wider market. The major US stock indices all fell sharply in early trading and shortly after the opening bell, the Dow Jones was down 140 points or 0.79% at 17,562, while the S&P 500 Index slid 0.70% to 2060.4. Dow component Cisco reports quarterly earnings after the market close on Thursday.
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