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Rogoff: US economy is tighter than you think

The U.S. labor market may be fast approaching its full capacity again but the Federal Reserve is still hesitant in raising its benchmark interest rate too quickly, Kenneth Rogoff, a professor of economics at Harvard University told CNBC.

"You've just gone through this epic recession, inflation has been below target for a really long time," he told CNBC at the Ambrosetti workshop in Italy.

"If inflation goes above target, (the Federal Reserve is) going to say they care but they really don't care. The big game here is not to have another double dip, not to cause problems."

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Ken Rogoff, Professor of Public Policy and Professor of Economics at Harvard University.
Adam Jeffery | CNBC
Ken Rogoff, Professor of Public Policy and Professor of Economics at Harvard University.

Nonetheless, Rogoff is bullish on the U.S. economy despite weak wage growth and below-target inflation. He concedes that there are a lot of indicators that the labor market is not "super-healthy" but believes that recent studies released at last week's Jackson Hole Symposium and recent economic data mean that it's fast improving.

"It's tighter than you think and (Fed Chair Janet Yellen) admitted that in her Jackson Hole speech," he said.

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The U.S. participation rate - a measure of both people who are working and those who are actively looking - will soon be back up to 64 to 65 percent, he added. July's number came in at 62.9 percent and last November hit 62.8 percent, its lowest level in more than three decades. The 30-year average stands at around 65.8 percent.

Kenneth Rogoff, professor of economics at Harvard University, talks with CNBC's Steve Sedgwick at the Ambrosetti forum, Italy
Mike Green
Kenneth Rogoff, professor of economics at Harvard University, talks with CNBC's Steve Sedgwick at the Ambrosetti forum, Italy

Economists have come up with a range of new reasons why the participation rate has been lagging other indicators at Jackson Hole, according to Rogoff, with some arguing that the participation rate was easily affected by factors like changes on how it is reported, retirees and people unable to move locations.

"It's very confusing," he admitted. "I tend to think (the participation rate) will come back."

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"I think there was a period where people were pulling out of the workforce who might have taken a job if it was possible, they were sort of on the fence, the elderly, people who may be doing a second job."

New figures are set to be released on Friday with the U.S. nonfarm payrolls due at 1.30 p.m. London time. Economists expect steady job growth—225,000 new jobs and a slight drop in the unemployment rate to 6.1 percent, according to Thomson Reuters.

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