Fed Won’t Make the Same Mistake Twice

A better understanding of the slack in the labor market will keep the Fed from threatening to raise rates rapidly

By Justin Lahart























The Federal Reserve said it needs ‘some further evidence’ the economy is improving before it lifts rates. Photo: Bloomberg News


The Federal Reserve is cued to raise rates when it next meets in December. But it will likely avoid the fallout caused by last year’s rate increase, largely because it better understands the jobs market.

Fed policy makers opted to keep rates on hold at the conclusion of their meeting Wednesday—an unsurprising decision with the election just six days away. But the Fed set the bar low for raising rates at its next meeting by saying it only needed “some further evidence” the economy is improving.

About the only thing that seems like it might keep the Fed from moving is postelection market turmoil.

When the Fed raised rates last December it wasn’t a surprise to investors, but its projection that it was going to lift rates four times in 2016 was. At that point, investors expected at most two increases.

That hawkish turn by the Fed was one of the factors behind the difficult couple of months in the market. Stocks fell sharply, the dollar ratcheted higher, commodity prices slipped, debt worries gripped emerging economies and, ultimately, the Fed was forced to change its tune.

A repeat isn’t likely, not just because the Fed wants to avoid creating more trouble, but because of a changing view of the economy.

Over the year before the Fed raised rates last December, the available data (since revised slightly) showed the U.S. had added an average of 220,000 jobs a month and the unemployment rate had gone to 5% from 5.8%. That suggested the job market was rapidly taking in slack, and that it might soon reach the point that wages begin to accelerate rapidly.

Since then, the labor market has continued to generate jobs at a healthy pace, averaging 187,000 jobs a month. And yet the unemployment rate is still at 5%—the result of more people entering the job market. So it turned out that there was more slack in the job market than the Fed, and many economists, thought. And there might well be more.

Reason enough for the Fed, when it does raise rates, to do so with a little less urgency.

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