The US unemployment rate has dropped from 9.8 per cent to 9.0 per cent in the last two months, and there have been signs that private sector employment may soon be rising at about 200,000 per month. Admittedly, this improvement is still a very minor one compared to the massive deterioration in employment which occurred in 2008-09, when 8.5 m jobs were lost in the economy. But at least the change is now in the right direction. (See this earlier blog.)
With the labour market beginning to improve, some members of the FOMC are contemplating an early tightening in monetary policy. Indeed, the markets now expect the Fed to raise short term interest rates by 1 per cent in the next 18 months. If this goes much further, it could undermine the strength of risk assets, and possibly also of the economy itself. So it is crucial to ask whether there really is a genuine case for the Fed to become concerned about the tightening of the labour market.
