The recent data has only strengthened the case that the U.S. economy is approaching full employment. Job gains in February are estimated at close to 300.000 while gains in January and December were at about 260.000 and 200.000, respectively (graph 1). Fed economists have recently estimated that the U.S. economy has to create about 100.000 jobs per months given the demographic changes that lie ahead, meaning that we have seen in the last quarter a pace of job creation that is far above trend.
While such an outcome would, of course, be highly undesirable, it seems to me that the concern is vastly overblown. Nominal wages are still below pre-crisis levels. Inflation has been below the 2% inflation target for a long time and only recently started to edge higher.
So why not let the economy run hot for the first time in a decade and see how much slack is remaining before starting a tightening cycle that inevitably will put a dampener on job growth?
Also why the fricking hell did it take us almost a decade to go back to full employment? The following chart should not look like as it does. It is truly amazing that it policy makers simply accepted extremely high levels of unemployment for several years.
Here are policies that the Fed could have tried to bring the economy back to full employment at a quicker pace:
1) Negative interest rates (like in the Eurozone and Japan)
2) A tax on paper money
3) A credible commitment to overshoot the inflation tagert
4) A credible commitment to raise the inflation target
5) A level target approach for the price level or, even better, nominal GDP
6) A helicopter drop
All of these policies are highly expansionary, but not a single one of them was implemented. All of those who think that the Fed was out of ammonition or that they did the best they can, well, they are wrong.
PS: The Fed did somewhat better than the ECB in the years right after the crisis. So they deserve a little credit. On the other hand, the ECB raised interest rates twice in 2011 while the economy was still very weak, which created the Eurozone debt crisis., and it took them a full 6 years to finally implement Quantitative Easing. Things have been much better since Draghi has taken over. He is the only one who has been pulling things together. I don't even want to imagine what would have happened if a "Bundesbank-spirited" economist was head of the ECB.