In addition, they find that the rate of involuntary part-time employment, which is still very high, also has a substantial influence on wage growth. 13 Putting it all together, their estimates say that if labor market conditions were at their 2005–07 levels, average real wage growth would be roughly 1/2 to 1 percentage point higher over the past year – another sign of the cyclical shortfall in labor market health. To sum up, with many important measures of labor market activity still well short of our estimates of cyclical norms, I believe it is a bit premature to say that we are close to our full employment target – the labor market is not yet calling for business-as-usual monetary policy That said, while it has taken longer than anyone would like, our progress has been good. Indeed, there is good reason to anticipate that we will achieve full employment and price stability within the FOMC’s current forecast horizon. Notably, in the Committee’s Summary of Economic Projections released a week and a half ago, most participants anticipated that the unemployment rate would return to its long-run neutral level by the end of 2016 and that inflation then would be in the range of 1-3/4 to 2 percent. A balanced approach to monetary policy Now let me turn to my views on monetary policy. I can’t speak to my FOMC colleagues’ forecasts and how they interact with their views regarding appropriate policy.
In this scenario, the FOMC could misjudge the presence and magnitude of economic impediments and misread the recent progress we have made as evidence of sounder economic trends. If we were to presume prematurely that the U.S. economy has returned to a more business-as-usual position and reduce monetary accommodation too soon, we could find ourselves in the very uncomfortable position of falling back into the ZLB environment. Such an outcome could be a serious setback to the timely attainment of our dual mandate policy objectives. This risk consideration means that the decision to lift the funds rate from zero should be made only when we have a great deal of confidence that growth has enough momentum to reach full employment and that inflation will return to a sustainable 2 percent rate. We should also proceed cautiously and keep the path of rate increases relatively shallow for some time after we begin to raise rates. This approach will allow us time to assess how the economy is performing under less accommodative financial conditions and reduce the odds of overaggressive rate hikes choking off progress toward our policy goals. History Shows That Premature Exit Is a Risk  15  See National Association for Business Economics (2014a). 16  See, for example, Kocherlakota (2013). 6  BIS central bankers’ speeches  Great depression Past experience with the ZLB also counsels patience. History has not looked kindly on attempts to prematurely remove monetary accommodation from economies that are in or near a liquidity trap.