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MonPol Report: The Case For Transitory Inflation And Labor Market Slack


The latest Monetary Policy Report reiterates the FOMC leadership's recent talking points on the dual-mandate objectives:

  • On inflation, the report makes the case for the recent spike in inflation as being merely "transitory", employing similar language to Chair Powell at the June FOMC press conference: "The price acceleration appears to have arisen largely from a small number of categories, as suggested by muted movements in the Dallas trimmed mean index...Overall, an important part of the rise in inflation this spring appears to be due to a surge in demand, including the rebound in travel-related spending, running up against short-run production bottlenecks and hiring difficulties. As these extraordinary circumstances pass, supply and demand should become better aligned, and inflation is widely expected to move down toward the FOMC's 2 percent longer run goal."
  • On employment: "much slack remains in the labor market": "Although the unemployment rate has moved down sharply from its pandemic high, broad measures of labor conditions continue to point to substantial slack in the labor market. The employment-to-population ratio, which encompasses both unemployment and labor force participation, remains well below the trend observed in recent years, at 58.0 percent in June. Adjusted to include workers who have exited the labor force since the start of the pandemic and workers on temporary layoff misclassified as nonparticipants, the unemployment rate was about 8.7 percent in June."
  • But "Many of the factors constraining labor force participation should gradually abate in the coming months."

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