Fed Watching – The Employment Debate

Speculation regarding the Fed’s next meeting and the possibility of higher interest rates remains at the forefront of financial news reporting.

As a reminder, the Fed’s three key objectives are: maximum employment, stable prices and moderate long-term interest rates.  The first two objectives are often referred to as the Fed’s dual mandate.

Currently, there is little debate regarding price stability (inflation) as most observers agree that inflation is not a near term concern.

Maximum employment is another matter.  Generally, most commentary has focused on the unemployment rate of approximately 5.1%, often considered to be at or near full employment.  However, this time declining unemployment has not seen commensurate increases  in wages.

Moreover, work force participation remains at relatively low levels, approximately 63%, to say nothing of the increasing prevalence of the “29 hour work week” and the unusually large number of individuals with part time jobs that would prefer to be working full time.

The question is, should the Fed be looking only at unemployment, as reported, or should they be giving serious consideration to other factors that suggest that there is still a lot of slack in the labor market?

Perhaps the Fed’s lack of action on interest rates reflects a broader approach to maximum employment than simply looking at unemployment data.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA®