Among the bedrock assumptions for 2014 among macro-economists, two are central: first, that the real GDP growth rate in the US will accelerate as the fiscal squeeze abates, and, second, that the Federal Reserve is now on “auto pilot”, and will taper its asset purchases by about $10bn per meeting until they disappear entirely before year end. Last week, the December jobs data challenged the comfortable assumption of accelerating GDP growth, and the publication of the latest FOMC minutes provided some interesting new insight into divisions within the Fed.
Most analysts have responded to these events by concluding that nothing much has really changed. That is probably right, for now. Although the employment report was something of a nightmare, involving both a very weak gain of only 74,000 in nonfarm payroll employment and another disconcerting drop of 0.2 per cent in the participation rate, it is only a single month’s reading, amid a snap of very cold weather. It will be brushed aside.
Longer term, the combination of only moderate employment growth with a shrinking labour supply is a persistent phenomenon that is likely to challenge the FOMC increasingly as 2014 progresses. The Committee seems fairly united for now around the announced path for tapering, but there are significant divisions in members’ underlying economic analysis that are likely to be laid bare before too long.