WASHINGTON: Nine-year-olds are about to see something they haven’t their entire lives: the Federal Reserve is going to increase interest rates.

And it’s probably going to do that in December. That, at least, was the message markets took from last month’s gangbusters jobs report. The economy added 271,000 jobs in October and another 12,000 in revisions to previous months, which was enough to push the unemployment rate down from 5.1 to 5 per cent for the good reason that people are finding work and not giving up looking for it.

And while it might just be a statistical error, as economist Dean Baker argues, the numbers even show wages rising 2.5pc the past year instead of the 2 to 2.2pc they have for most of the recovery. Add it all up, and this is an economy that hasn’t lost any momentum, as it looked like it might have, but rather is still chugging along at the same 200,000-jobs-a-month pace it has been for awhile now.

That’s probably good enough for the Fed to start raising rates. Now, it’d normally be doing that already with unemployment in the 5pc range, but seven years after the financial crisis, there still isn’t a lot that’s normal about the economy.

Indeed, inflation is still so low, just 0.15pc, that the Fed has been waiting for a little more confirmation that unemployment is going to come down and the rest of the world isn’t going to go down the tubes before it does anything. Both of those looked like shaky propositions just a few months ago.

The US economy had seemed to slow down in August and September when it only added an average of 145,000 jobs a month, and China’s appeared to be on the same trajectory when it devalued its currency. But, in both cases, it wasn’t clear whether this was just a blip or the beginning of something bad.

Well, now we know it was the first. The US economy wasn’t doing as poorly as it seemed in September, but neither is doing as well as it seems today. It’s been doing the same the whole time: pretty well.

The economy is still adding jobs at a relatively robust 3-month average of 187,000 a month, which is in line with what it’s been doing for the last five years. And that’s more impressive than it sounds, since the unemployment rate is a lot lower now than it was in, say, 2011. In fact, it’s about as low as the Fed thinks it can without making inflation go up.

But just because the Fed probably will raise rates in December doesn’t mean it should. Why not?

Think about it like this. If the Fed waits too long and inflation takes off, it can deal with that problem pretty easily by raising rates a little faster than it wanted to. But if doesn’t wait long enough, it might have to reverse course and cut rates back to zero-and then what?

It could try cutting rates into negative territory, like other countries have done, or it could start buying bonds with newly-printed money again. But these don’t seem to work as well as normal policy. The Fed, in other words, needs to be sure that it won’t have to turn around right away after it starts raising rates.

How can it? Well, it will know it’s time to raise rates when wages or prices do actually start going up. Now, that might be happening now, but it might not. The data is noisy, and we just can’t say for sure whether the latest wage numbers are a head-fake or a sign they’re heading up. A couple more jobs reports would tell us, though.

If workers really are getting raises, then we’ll know there isn’t much slack left in the economy and we need to tighten policy. But if they aren’t, then the recovery still has a ways to go, and why put any more hurdles in front of it in the form of higher interest rates?

By arrangement with The Washington Post

Published in Dawn, November 8th, 2015

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