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Tuesday, November 14, 2006

Poole: The Federal Funds Outlook is "Roughly Symmetrical"

St. Louis Fed president William Poole gives his outlook for the federal funds rate:

Fed's Poole Says Interest-Rate Stance 'About Right', by Scott Lanman and Craig Torres, Bloomberg: Federal Reserve Bank of St. Louis President William Poole said the central bank's interest-rate stance is ''about right,'' though higher borrowing costs will be needed should the Fed fail to bring inflation down.

''We need a policy that is disciplined enough to get the job done, but not more so,'' Poole told reporters after a speech in Wilmington, Delaware. ''If all the information taken together suggests that we are not making progress, then I will be among those who will push for a tighter policy.''

Poole said inflation expectations are ''well controlled''... ''The market does believe we're serious'' about containing inflation,'' Poole said.

He reiterated that he sees the outlook for the fed funds rate as ''roughly symmetrical,'' meaning the chances of an interest-rate cut and an increase are about equal. ... ''I can imagine data coming in that would make me want to tighten policy, and I could imagine data coming in that would make me want to ease policy,'' Poole said. ''I don't think we are way behind.'' ...

Poole said ... that while the housing market's slump may deepen, central bankers shouldn't adjust interest rates unless the slowdown endangers the broader economy. ''We just don't know how much further the housing downturn has to go,'' Poole said. ''As long as the housing problem remains confined to housing, there is really nothing the Federal Reserve can or should do.'' ...

The housing market is seeing ''significant price softness'' and may be weaker than it appears, and the level of concessions by home builders to buyers is also a concern, Poole told the audience.

In his speech, Poole said slower growth in the U.S. labor force, a result of retiring baby-boomers, will make it tougher for central bankers to set interest rates properly next year. ...

''With the baby-boom generation starting to retire, we'll have to change our view of normal job creation,'' ... ''Uncertainty over trend labor force growth will complicate the Fed's job next year.'' If job growth next year is ''modestly below'' the 2006 average pace of 150,000 per month, Fed policy makers will have to judge whether the growth is ''outrunning'' the pace of available labor, or whether the potential labor-growth rate is at the high end of estimates, Poole said.

Recent revisions to job growth by the Labor Department were a ''surprise to all of us,'' Poole said... The government in October said the economy gained 810,000 more jobs than previously estimated in the year ended in March.

''It certainly looks like the labor market is pretty fully employed,'' Poole told reporters. He said employers are having difficulty hiring in part because prospective workers are unable to pass tests for illicit substances in their bodies. ''That's a big issue,'' Poole said. ''You talk to employers, and they will tell you that that is one of their biggest issues -- to find people who qualify in terms of the job plus being able to pass a drug test.'' ...

It's hard to set policy if you are unsure if you are at full employment or not, and there appears to be growing uncertainty about the number of new jobs required to maintain full employment.  Here's a link to Poole's speech, "U.S. Labor Input in Coming Years," which focuses on the labor participation and full employment issue.

And, on the methodology for the calculations, this is from a comment on another post:

From Moskow's footnote: The methodology for forecasting labor force participation developed in Aaronson and Sullivan (2001) suggests that, currently, the participation rate is trending downward about 0.2 percentage point per year. Alternatively, Toosi (2005) forecasts a drop of about 0.1 percentage point per year over the next ten years, while Aaronson, et al. (2006) predict a drop of about 0.3 percentage point per year. Given that the working-age population is growing at a rate of about 1.2% per year, the median of these estimates implies a labor force growth rate of about 0.9% per year. On a base of around 135 million, this suggests monthly increases of approximately 100,000 for nonfarm payroll employment. (135 million * 1.009 / 12 = 101,000.)

Aaronson, Daniel and Daniel Sullivan (2001), "Growth in Worker Quality," Federal Reserve Bank of Chicago Economic Perspectives, 4th Quarter, pp. 53-74. 

Tossi, Mitra (2005), "Labor Force Projections to 2014: Retiring Boomers," Monthly Labor Review, November, pp. 25-44. http://www.bls.gov/opub/mlr/2005/11/art3full.pdf

Aaronson, Stephanie, Bruce Fallick, Andrew Figura, Jonathon Pringle, and William Wascher (2006), "The Recent Decline in Labor Force Participation and its Implications for Potential Labor Supply," March, prepared for the Spring 2006 meeting of the Brookings Panel on Economic Activity.

    Posted by on Tuesday, November 14, 2006 at 05:07 PM in Academic Papers, Economics, Monetary Policy | Permalink  TrackBack (1)  Comments (2)


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