Minutes from the March Fed meeting released Wednesday had a couple of revelations that showed policy makers are willing to see just how many people can be pulled back into an improving labor market.
We already knew that Fed officials lowered their estimates of what unemployment rate would correspond to an economy making full use of labor resources, based on their economic projections released last month. However, the minutes published Wednesday show that more than half of the 17 policy makers at the meeting did this, meaning the opinion that the labor market has room to tighten further is broadly shared. Both the top and bottom end of their estimate range moved lower.
Fed officials are saying that labor markets can run even hotter without generating inflation. The minutes said policy makers are taking their cues from the absence of wage pressure even as the unemployment rate stood at 5.5 percent in February and March, the lowest level since May 2008. Limited wage growth may be a sign that employers don’t yet need to dangle higher pay in order to attract talent, meaning a lot of people remain on the sidelines of the labor market.
The minutes also revealed that policy makers may lower their estimate of full employment even further, when officials retool their forecasts in June. A few of them noted that continued modest wage growth could prompt them to reduce their estimates of the longer-run normal rate of unemployment.
Their reasoning is consistent with Fed Chair Janet Yellen‘s view that the unemployment rate doesn’t fully capture all the slack in the labor market. The chart below shows that nearly 7 million people are still working part time when they would prefer full-time work.
Wrapping it all together, it looks like Fed officials will drag their feet in this rate-hike cycle.
Even as late as 2017, with the unemployment rate averaging 4.8 percent to 5.1 percent in the final three months of the year, Fed policy makers estimate their benchmark rate will still be below what they consider normal in the longer run. Their reasons, explained in the minutes, range from “headwinds” — a catchall term that includes still-tight lending standards among other things — to the stronger dollar‘s impact on exports, to “residual slack in the labor markets.”
Fed officials, the minutes said, were split over how soon they would start that rate cycle, with several aiming for June, and others arguing for a later increase.
The recession was a huge blow to the U.S. job market, and even two years from now — and eight years after the recession — the Fed says it will still have a policy aimed at generating even more employment.