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Us Economy Enters Full Employment Territory Essay

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US Economy Enters Full Employment Territory The Fed has, over the past few years, been lowering its estimate of long-term potential real GDP growth. Presently, the Federal Open Market Committee (FOMC) believes the US economy is capable of sustaining expansion of just +1.8% per annum. This estimate is based on two components: 1) anticipated labour force growth of +0.3% pa, and 2) annual productivity increases of +1.5%. Given the Fed’s commitment to its 2% long-term inflation target, this backdrop would consequently imply that wage inflation should be running at around +3.5% when the economy eventually hits full employment. Average hourly earnings have been ticking up recently, thereby confirming that the US labour market is tightening, although the annual increase is still below +3%. There is, however, still some slack in the labour market, as characterised by the “U6” measure of underemployment which is still 150 basis points above its low reached during the previous expansion. Fed Chair Yellen has been prepared to wait until broader measures of labour underutilisation, such as U6, improve further. The luxury of being able to sit pat is, however, now fading. Financial markets now expect the FOMC to raise the federal funds rate at this year’s final policy meeting next month. Meanwhile, the FOMC will still be keen to stress that any subsequent rate hikes will remain gradual. This seemingly benign outcome may, however, be beyond its control: fiscal policy will be eased in 2017,
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