Will the U.S. achieve full employment within 2 years?
Keynote: The Fed's Lockhart shares his views on U.S. economy (Part 3 of 6)
Lockhart talks about labor market slack
Like all other Federal Reserve policy-makers, Dennis Lockhart, Chief of the Federal Reserve Bank of Atlanta, is faced with the question about how much slack remains in the labor market. The Fed’s current Chair, Janet Yellen, discussed measuring slack in the labor market at the recent Economic Policy Symposium in Jackson Hole, Wyoming. (To learn more about Janet Yellen’s views, read Overview: Takeaways from Janet Yellen’s speech at Jackson Hole). The Fed’s Governor, Jerome Powell, and the St. Louis Federal Reserve Chief, James Bullard, also laid down their views on labor market slack over the last two months.
Investment impact
Policy statements and estimates released by Federal Reserve officials have a direct bearing on U.S. financial markets. Stakeholders and investors use this information to get an idea about what’s in store for the economy. For example, a lowering of interest rates to promote credit and investment in the economy tends to drive stock markets (SPY) (VTI) (DIA) higher on growth expectations. Meanwhile, bond markets (BND) (AGG) become wary of inflationary pressures that cause nominal bond yields to rise and bond prices to fall.
Federal Reserve communications
Following its September Federal Open Market Committee (or FOMC) meeting, the Fed restated its concerns about a residual under-utilization of labor resources, or slack, in the U.S. economy. Lockhart affirms the FOMC’s view. Disappointing evidence in August’s national payroll jobs report showed the average rate of jobs growth seen in the previous seven months was not maintained. The official unemployment rate—which stands at 6.1%—has been stuck around that level for a few months now.
Marginally attached workers
The broad measures used to determine unemployment in the U.S. include the so-called marginally attached in the workforce and in the ranks of the unemployed. Marginally attached workers are those who are available for work but, for whatever reasons, did not look for work in the last month. Unemployment measures also classify part-time workers who would prefer to be working full-time as not fully employed.
For these reasons, the official unemployment rate alone isn’t adequate to assess labor market conditions. The extent of labor market slack and its impact remain unclear.
Wage pressures
Broadly speaking, the current level of official unemployment is still some distance from Lockhart’s forecast of full employment. So, how do we assess labor market slack? According to Lockhart, observing wage pressures is one way to assess the extent of labor slack. We’ll look at this next.
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