Economists at the Federal Reserve have devised a new indicator, which they hold will enable US central bank policymakers to get better information regarding the state of the labor market. The metric is labeled as the Labor Market Conditions Index (LMCI).
Note that one of the key data points Fed policymakers are paying attention to is the labor market. The state of this market dictates the type of monetary policy that is going to be implemented.
Fed policymakers are of the view that it is the task of the central bank to navigate the economy toward a path of stable self-sustaining economic growth.
One of the indicators that is believed could inform policymakers about how far the economy is from this path is the state of the labor market.
A strengthening of the labor market is seen as indicative that the economy may not be far from the desired growth path.
A weakening in the labor market is interpreted as indicating that the distance is widening and the economy’s ability to stand on its own feet is diminishing.
Once the labor market shows strengthening this also raises the likelihood that the Fed will reduce its support to the economy. After all, to provide support while the economy is on a path of stable self-sustained growth could push the economy away from this path toward a path of accelerating price inflation, so it is held.
This post was published at Ludwig von Mises Institute on Tuesday, October 21, 2014.
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