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Dallas Fed Economic Letter Assesses Progress Toward Full Employment and Price Stability

For immediate release: October 20, 2014

DALLAS—Thanks partly to the Federal Reserve’s highly accommodative monetary policy, the U.S. economy is closing in on full employment and price stability, according to Federal Reserve Bank of Dallas president and CEO Richard W. Fisher and senior vice president and principal policy advisor Evan F. Koenig.

“There are good reasons to believe that we’ll achieve our full-employment and price-stability objectives fairly soon—perhaps as early as next year,” write Fisher and Koenig in the Federal Reserve Bank of Dallas’ latest Economic Letter. “That prospect gives increased urgency to the question: When should we start removing monetary policy accommodation?”

Fisher and Koenig recall that Fed policymakers successfully “tapped the brakes” in the middle of three of the nation’s longest economic expansions (in the 1960s, 1980s and 1990s), slowing—but not ending—the unemployment rate’s decline.

“By comparison, there are no instances where the Fed has successfully eased the unemployment rate upward after having first overshot full employment: When the economy goes into reverse, it has a pronounced tendency to lurch backward all the way into recession,” they write.

The authors note the Survey of Professional Forecasters’ median expectation of personal consumption expenditures (PCE) headline inflation four quarters into the future has primarily stayed in a narrow range of between 1.7 and 2.1 percent. And the current median expected inflation rate, in third quarter 2015, is 2 percent, which is the Fed’s long-range inflation target.

The maximum employment half of the Fed’s mandate also may be at hand, Fisher and Koenig note. “We’re not there yet, but we’re getting close,” they write.

The September unemployment rate of 5.9 percent is only slightly above the Congressional Budget Office’s estimate of the longer-run sustainable, or “natural,” rate of unemployment, according to the authors.

Fisher and Koenig argue that the behavior of wage growth during the recovery to date has not been unusual. Wage growth is likely to pick up in the coming year and rise faster as the unemployment rate falls further toward the range of natural-rate estimates. Already business surveys suggest that employers are planning more-rapid wage increases.

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Media contact:
James Hoard
Federal Reserve Bank of Dallas
Phone: 214-922-5307
Email: james.hoard@dal.frb.org