Are central banks falling behind the curve?

The Federal Reserve places a great deal of emphasis on employment in determining when to remove monetary stimulus. And yet, despite considerable improvement in the United States labour market of late, there has been no move to actually remove stimulus.

A Bloomberg report last week pointed out the ambiguous employment situation that is complicating the Fed's policy outlook.

The U.S. labor market is looking a little surreal these days.

Take the number of workers filing claims for unemployment benefits. As a share of the population, it’s the lowest since at least 1967... Yet the ranks of the long-term unemployed remain larger than at any time before the 2007-2009 recession.

That leads to two starkly different views of the U.S. economy. In one, job growth is increasing along with inflation, leaving Yellen, now at the helm of the U.S. central bank, behind the curve with recession-era monetary policy still in place. The other view portrays a fragile recovery that owes its modest gains to the Fed’s near-zero interest rates. The job-market contrasts are dividing economy-watchers on when the Fed should start raising rates, which it hasn’t done since 2006.

While most of the economists cited by the report supported continued monetary stimulus, there is at least one dissenting view.

By pressing on with easy money policies in the face of such data, the Fed is playing “a very dangerous game,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. “What are you waiting for? Everything to get back to the cyclical peak to take rates off of zero?”

If the Fed is behind the curve, it would probably not be the only central bank to be so.

Another Bloomberg report points out that the People’s Bank of China has historically cut interest rates only after the economy has weakened enough to drag down stock prices.

Indeed, even as investors await possible interest rate cuts from the PBC, China's property market already appears to be cooling. Average new home prices in China's 70 major cities fell 0.9 percent in July, according to Reuters calculations from official data published on Monday. This was the third consecutive monthly decline.