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What does the Fed chair worry about? Slack

Conrad Wilson Jul 2, 2014
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The Labor Department releases its latest jobs report this Thursday, and a lot of economists are talking about  “slack” – the unused part of the economy.

“’Slack’ means that there are significantly more people willing and capable of filling a job than there are jobs for them to fill,” said Federal Reserve Chair Janet Yellen during a speech in Chicago back in May. “There remains considerable slack in the economy in the labor market.”

Slack matters. But just how much of the economy isn’t being used right now is a matter of debate.

“Slack in the labor market is often one of the first things the Fed looks at in terms of setting monetary policy,” says Mark Calabria, director of financial regulation studies at the Cato Institute.

And by monetary policy, he’s talking about interest rates and other ways the Fed fights inflation.

“To the extent there is slack in the labor market, slack in the overall economy, you’re not producing as much as you would otherwise,” Calabria says. “You’re certainly falling short of the potential in terms of the economy.”

Calabria says slack means we’re a less wealthy society than we could otherwise be. It also matters for the un- or under-employed.

Justin Wolfers, professor of economics and public policy at the University of Michigan, says the economy is recovering from an “extremely unusual recession” that’s left the labor market in a state it’s never been in before. And that’s causing some uncertainty. 

“If we had run out of slack, then we should start to see wages and inflation really starting to rise right now,” Wolfers says. “But we don’t see that at all. And so by that measure it suggests we’ve got quite a long way to go.”

And since the head of the Federal Reserve thinks there’s a lot of slack in the economy, it probably means lower interest rates for a longer amount of time.

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