How the Fed Lost Its Faith in 'Full Employment' - The New York Times

The unemployment rate in the United States has been dropping steadily since the end of 2009.

The share of people actively looking for work has long been used as a measure of the health of the American economy. After the recession, it fell as people found jobs.

Since at least 2011, businesses have suggested that the labor market is running out of workers.

“Finding skilled workers continued to be a major concern.”

A Federal Reserve report on regional business surveys

The Fed’s job is to sustain maximum employment while keeping inflation stable by using interest rates and other tools to guide the economy.

If joblessness falls too low for too long, it could speed up wage and price growth. As a result, the Fed has typically lifted rates as the labor market heated to prevent things from getting out of control.

As the unemployment rate continued to fall in 2013, the Fed held rates steady to keep stimulating the economy after the recession.

How patient the Fed decides to be when setting interest rates has huge implications for ordinary people. If inflation takes off, households lose spending power. But if prices are subdued and the Fed lifts rates earlier and more aggressively than is necessary, it could needlessly slow growth, leaving millions out of work for longer.

With joblessness continuing to fall, some Fed officials began to warn that full employment might be approaching.

“When you see the economy getting as close as we are to full employment, to stable inflation, it would suggest to me that the time has come to do that.”

Esther George, president of the Federal Reserve Bank of Kansas City, on considering rate increases

“We are basically very near or at full employment, from the point of view of what the Fed can do with monetary policy.”

Loretta Mester, president of the Federal Reserve Bank of Cleveland

In 2015, the unemployment rate first fell below 5.1 percent, the level that policymakers at the time deemed sustainable in the longer term.

To prevent inflation from rising rapidly as unemployment fell, the Fed under Janet L. Yellen began slowly lifting interest rates. The moves came more gradually than many conservative economists and lawmakers urged.

“The unemployment rate has fallen from 10 percent to 5 percent, close to the level that many observers associate with full employment.”

Jerome H. Powell, then a Fed governor

“Fed take note: core Pce up 1.9 % and Hourly Earnings up 2.9 % - U.S. at full employment - time for emergency rates OVER!”

Richard Clarida, who would become Fed vice chair, on Twitter

“The economy is near maximum employment, and inflation is moving toward our goal.”

Janet L. Yellen, the Fed chair

As Fed officials and economists declared that the economy was at or near full employment, some predicted that job gains would soon slow and wages would rise much more quickly.

But they didn’t.

The Fed continued on its path of steady rate increases after President Trump chose Jerome H. Powell as the new Fed chair. The central bank would raise rates nine times by the end of 2018.

Unemployment hovered near a half-century low, and would-be workers — many thought to be permanently sidelined — found jobs. Officials began to question whether that could continue.

“If this economy can run an unemployment rate of 3.5 percent — I’ll just use that number — and have inflation be stable, and be in good macroeconomic balance, that’s terrific news. I would love that to be true.”

John Williams, president of the Federal Reserve Bank of New York

Now, at the end of the decade, people are still finding jobs. As workers return to the labor market, wages are growing moderately and inflation is lower than the Fed had anticipated.

In recent years, the Fed’s understanding of what full employment means has begun to fundamentally shift.

“We can sustain much lower levels of unemployment than had been thought. ... To call it hot, you’d want to see heat. You’d want to see higher wages.”

Mr. Powell on Wednesday

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How the Fed Lost Its Faith in 'Full Employment' - The New York Times
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