Fair point by Jared Bernstein

He says that the US is probably not at full employment. And he presents some decent evidence in favor of that.

I have argued that it is important for issues like fiscal and trade policy that the US is now effectively near full employment and — more to the point — that the US has escaped liquidity trap, at least for now, which is the relevant horizon in this case.

The possibility that the US is not at full employment has implications for monetary policy.  At the margin, it strengthens the case for being dovish, something I am not inclined to fight because a) I might be slightly off in my guess that we are at full employment and b) I think an overshoot of 2% inflation would be wise in the late cycle.

BUT, because the unemployment rate has fallen, the Fed is quite sensibly no longer trying to deliver as much stimulus and as quick a decline in the unemployment rate as is possible. It follows from this that policy innovations elsewhere * that lead (mainly) to a rise of aggregate demand (without having other merits) will systematically be offset by the Fed.  This is a point of simple logic and is not model dependent. The model or models driving the Fed’s behavior may be wrong, but that is a separate discussion.

Take a look at this chart from Jared Bernstein making the point that we are not quite yet at full employment. On his own premise, we are 8/9 the way to what he wants.  For the purposes of assessing the full derivative of policy innovations away from monetary policy, that is close enough, practically speaking.

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* We can put this in a different way.  Bernstein wants the Fed’s objective for demand growth to be higher than the Fed occasionally  lets on and others advise for the Fed. I share Bernstein’s view on that. But once we accept that the Fed has AN objective, regardless of what it is, the fact that we are away from liquidity trap and somewhere near the objective for employment, dominates this — in terms of the full derivative implications of policy innovations away from monetary policy.  It seems to me that people have trouble with this fairly basic point. It is a rather dumb time rather dumb timing now to be dreaming up fiscal stimulus, worrying about trade drag or figuring out a way to get credit growth going.