The San Francisco Fed took another look at the role of long-term unemployment on inflation and concluded — shocker — that it’s important.
If long-term unemployed have given up looking for work they won’t keep wages low and competition for the short-term unemployed could cause inflation to breach 2% by mid-2015. If they begin to enter the workforce then wages will remain low and 2% inflation is not a threat next year.
Yellen and the core of the Fed have placed themselves in the second camp and it gives them leeway to delay rate hikes in the year ahead or proceed cautiously once the rate hike cycle begins.
