The U.S. Jobs Report Is Almost Too Good

(Bloomberg Opinion) -- How much insurance should the Federal Reserve buy?

Almost a decade into the economic expansion, the U.S. jobs machine keeps humming along. Inflation is back to target, but showing no sign of the spurt that might theoretically come with a jobless rate of 3.7 percent and yet another month of 200,000-plus new jobs. The unemployment rate is almost a full percentage point below the 4.5 percent that the Fed judges sustainable over the long run.

October's labor report was almost too good. America is still the biggest economy, and global growth is becoming more lopsided. That's not great, given how interconnected global commerce has become. Given the weaker outlook elsewhere, especially in Europe, China and emerging markets, the Fed would be wise not to overdo its increases in interest rates. Hike to neutral, as best we can guess it, by all means. The less-than-benign external environment warrants a pause at that point.

Neutral monetary policy, a hard-to-define point that neither hits the brakes nor juices the economy, may not be far away by one rough measure. Projections released by the Fed in September showed that the long-run sustainable benchmark rate is 3 percent. After almost two years of steady quarter-point increases every three months, the rate is now in a range of 2 percent to 2.25 percent. Another step in December is basically a done deal. That would leave two more.

The “insurance” question is whether the Fed wants to take the risk that wages and prices will start to spiral upward as the jobless rate falls closer to, say, 3 percent. Is that the tipping point? Do policy makers want to be blamed for not having done enough earlier? The Fed also has to balance its domestic formal mandate with the reality that what it does skews borrowing costs and growth everywhere in the world, especially as long as the dollar remains the world's most important reserve currency.

Chairman Jerome Powell must also consider whether churning financial markets are saying something significant has changed about the underlying economic outlook. But the Fed's job isn't to make every trader happy every day.

With fresh forecasts in December, the Fed can start to assess whether a change in course might be in order. Plenty of time before then to consider: Just how lopsided does the U.S. want the world to be?

To contact the editor responsible for this story: Philip Gray at philipgray@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss writes and edits articles on economics for Bloomberg Opinion. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

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