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Two numbers that are holding back a Fed rate hike

The work of the professional Fed watcher has become more complicated of late. It used to be as easy as keeping an eye on inflation and the unemployment rate. But the Fed's leaders have made clear they don't fully trust those dials right how. They have upgraded to a dashboard worthy of this Big Data era.

At least Fed chair Janet Yellen has been good about telling everyone about the many gauges she's watching. Two of them, the rate at which companies are hiring and the rate at which workers are quitting, were updated by the Labor Department Tuesday. Unlike the broader unemployment rate, which is returning to a level at which the Fed typically would equate with full employment, these more granular measures of labour market dynamics suggest the U.S. economy is less than fully healed. The data reinforce Ms. Yellen's argument that higher borrowing costs can wait.

Somewhat counterintuitively, economists like it when workers are bailing on their employers. As Ms. Yellen said in March, a "pickup in the quit rate, which also remains at a low level, would signal that workers perceive that their chances to be rehired are good – in other words, that labour demand has strengthened."

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If Ms. Yellen perceived the quit rate as low in March, she remains disappointed today. Adjusted for inflation, the quit rate was 1.8 per cent in June, unchanged from the start of the year. The rate was 1.6 per cent in June, 2013.

Similarly, employers hired 4.83 million people in June, compared with 4.74 million in May, lifting the hiring rate to 3.5 per cent from 3.4 per cent. The quit and hiring rates sunk during the recession and have steadily climbed from those lows. Yet they still are below pre-recession levels. In the years ahead of the Great Recession, the quit rate floated above 2 per cent and the hiring rate was closer to 4 per cent than 3.5 per cent.

Assuming inflation remains contained, the quit and hiring rates will have to move higher before Ms. Yellen takes seriously the idea of raising the benchmark rate from zero. Other economists will fight this interpretation of the data. Pavilion Global Markets, a Montreal-based research firm, is skeptical that pre-recession readings of the labour are useful benchmarks. Pavilion's economists think structural changes, such as faster rates of retirement, imply a less dynamic labour force in the years ahead.

Analysts at Barclays noted Tuesday that the Labour Department's summary of job openings and labour turnover also showed the ratio of unemployed job seekers to job openings fell to 2.02 from 2.14 in May. The ratio now is the lowest since 2008 and is below the 2002-06 average of 2.18. "This suggests that there is little slack remaining in labour markets and that wage growth will pick up more quickly than it did at similar levels of unemployment rate in past cycles," Michael Gapen told clients in a note.

One assumes Fed officials are exploring these questions. The central bank's leaders have indicated they agree that the post-recession economy may lack the potential to hit the high speeds the U.S. reached previously. But so far, Ms. Yellen and her closest lieutenants seem to think that argues for keeping interest rates low.

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More


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