Last week, the Federal Open Market Committee (FOMC) — the group that determines monetary policy at the Federal Reserve — released the minutes from its meeting in December. Within the record, Tim Duy, an economics professor at the University of Oregon who runs the blog Fed Watch, caught a stray sentence: "it was noted that the Committee might begin normalization at a time when core inflation was near current levels." This is unnerving. 

The Fed is basically saying it might hike short-term interest rates even if the core inflation rate — just regular inflation with the price of food and energy stripped out —  stays at its current level of 1.7 percent. That should raise the eyebrow of anyone who's concerned with the health of the American labor force.

Despite its stale, bureaucratic demeanor, the Fed has been the site of one of the most intense economic policy disputes since the 2008 financial crisis. While labor-oriented policymakers have urged prioritizing the fight against unemployment, inflation hawks have wrung their hands over an imagined threat that has yet to manifest itself. To date the labor-oriented economists have won out. But the sentence that Duy caught could indicate an ominous shift in thinking.

Last Friday’s jobs report was certainly a breath of fresh air, but it still featured many of the long-term problems that have bedevilled the economy since the recession. Despite the job gains, wage growth remains flat; long-term unemployment is still historically high; and the number of people participating in the labor force is still historically low. Raising interest rates won't solve these very real problem in our labor force — in fact, it could exacerbate them.

The Fed's primary tool — short-term interest rates — can be driven up to keep inflation in check, or driven down to encourage job and wage growth. But it can't do both. Since labor is what's bought and sold in the market more than anything, it’s the price of labor — i.e. wages — that's the biggest driver of inflation. You can't throttle back inflation without throttling back wages and job growth, and you can't lift wages and jobs without some amount of inflation.

As University of Michigan economics professor Justin Wolfers writes in The New York Times, a number of critical questions about the economy remain unanswered. How much will businesses allow their labor costs to eat into profits before they start hiking prices? How many of the unemployed will get jobs before businesses have to raise wages? As Wolfers noted, many economists — and FOMC policymakers — have assumed that businesses will run out of room on all those fronts — thus sparking inflation — when unemployment gets into the 5-to-5.8 percent range. But we're already at 5.6 percent, and inflation remains historically low.

Now the Fed certainly isn't blind. That key sentence is just a statement of where the FOMC’s head is at, not a promise. They’ll be watching multiple factors, from job growth to GDP to the financial sector, to determine their next move, perhaps sometime mid-year. "I think they’re going to have a hard time normalizing policy if wage growth is not there and inflation is not there to support it," Duy noted.

But pretty much by definition, we won't even begin to know whether we've maxed out the economy’s ability to absorb new workers until inflation has ticked up a few notches over where it is now. 

Acknowledging the Fed might raise interest rates before inflation rates rise suggests that the central bank feels the risks of inflation far more acutely than the risks of unemployment. But any objective assessment of the data we’re seeing from the economy right now, not to mention the damage we’ve already suffered, leans hard in favor of taking precisely the opposite tack. So yes, the news that the FOMC is even open to the idea of starting to throttle back the economy at current inflation levels is unnerving.