Generous interpretation of what Yellen up to


Bloomberg claims that Fed Chair Yellen’s “bet” that discouraged workers can be dragged back into the labor market with a high pressure economy is “paying off.”

I have nothing critical to offer on Yellen’s job performance, aside from maybe gently ribbing her for fibbing a lot.  But I think that argument is a bit too generous.

For starters, the labor force participation rate has not actually recovered much in response to Yellen’s alleged bet.  Probably it is up slightly on a detrended basis, but by the same token it is pretty near estimates, such as that produced by CBO, of its “natural” level.   Of course, CBO and others could be wrong.  (I am working with low tech here, so my charts will be even cruder than usual.)

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The Bloomberg journalist does not actually make a claim about the level of the participation rate, actual, detrended or natural.  Rather she shows a measure of the flow of workers from non-participation into employment.  Unfortunately, that measure does not support her main point, though.  The relevant metric here is the cumulative sum, not the number of months out of six that it had the right sign.

(Sorry to be grumpy, but Bloomberg — like BI– needs to impose a bit more quality control on their reporting, IMV. The purpose should be to inform, not confuse for the sake of novelty.)

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In any case, the Bloomberg claim would seem to be dominated on Ocham grounds by the simpler point that inflation is undershooting the Fed’s 2% objective.  If inflation were higher, I doubt Yellen would be making the “bet” attributed to her.

With inflation below target, the Fed is arguably forced into probing lower/tighter on unemployment.  I got no problem with that. What do I know?  The only points I would raise here are that it is a tricky situation for them, it is very unwise just to ignore inflation as “trailing”, and that we don’t need to lean on notion of exotic “bets”, though that may get clicks.

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