First, the statement indicated the committee needed to see “some further improvement in the labor market.” In my own view, this condition has largely been met by the continued growth in payroll employment – averaging in excess of 200,000 jobs per month, year-to-date through July, and a U-3 unemployment rate – the typical, widely reported measure of unemployment – that is currently at 5.3 percent.
The second condition noted in the statement was that policymakers must be “reasonably confident that [PCE] inflation will move back to its 2 percent objective over the medium term.” For this condition, the data have not been as clear-cut. Core PCE inflation for the past year has only been 1.2 percent, and recently there have been substantial declines in oil prices and other commodity prices. These will likely feed into core (and headline) measures of inflation for some months to come, temporarily lowering inflation readings. Adding to this, recent reports on wages and salaries still show few signs that the tightening labor markets are translating to increases in wages and salaries consistent with reaching 2 percent inflation.
As a result, current data have yet to indicate that this second condition will be met in the coming months; instead, policymakers will need to rely on forecasts of inflation...
Such a forecast needs to be mindful of recent developments, including data that suggest the slowing of foreign economies, coupled with volatile stock prices and falling commodity prices – both of which are consistent with a weaker global economy. In my view, these developments might suggest a downward revision in the forecast that is large enough to raise concerns about whether further tightening of labor markets is likely. And without an expectation of growth above potential and further tightening of labor markets, I would lose my primary rationale for a forecast of rising inflation, diminishing my confidence that inflation will reach the 2 percent target within a reasonable time frame.