Even as US unemployment crept lower in recent years, Federal Reserve Chair Janet Yellen stuck with a glacial pace of policy tightening that she justified with a powerful message: there were still millions of potential workers to pull in from the labour ma
Even as US unemployment crept lower in recent years, Federal Reserve Chair Janet Yellen stuck with a glacial pace of policy tightening that she justified with a powerful message: there were still millions of potential workers to pull in from the labour market’s sidelines.
The latest news from the labour market is proving her right.
While June’s US payroll report keeps the central bank on track to raise rates once more this year and begin unwinding its $4.5 trillion balance sheet, it also suggests that Yellen’s decision to hold interest rates lower than some critics and colleagues preferred has helped heal some of the harm done by the Great Recession.
Her goal was to foster a sustained recovery that would help to draw Americans who had dropped out of the labourforce back into employment. This was a gamble. If workers hadn’t come back, the strategy could have spurred an overly-tight labour market that sent wages and inflation up too quickly. That in turn could have forced the Fed to raise rates more aggressively and put the recovery at risk.
But come back they have. The flow of people moving from outside of the labour force straight into jobs jumped in June to 4.7 million, its highest level in records that go back to 1990. Labour force participation has stabilized after a long-run decline, and the share of the population that works continues to rise moderately. And as long-hidden labour market slack gets absorbed, it could be helping to keep wage gains modest and inflation in check.
The surge of job holders coming from outside the labour force “speaks to the reduction in slack in the labour force,” said Tom Simons, a senior economist at Jefferies LLC in New York. “For the Fed this is a very encouraging sign and fits the narrative that they’re going to continue on with their normalization plan.”
Yellen, who argues that strong hiring will feed through to higher wages and price pressures in time, can explain her labour-market views further when she delivers semi-annual testimony to Congress this month. She speaks to the House Financial Services Committee on July 12 and the Senate Banking Committee on July 13.
She said in October 2016 that “a tight labour market might draw in potential workers who would otherwise sit on the sidelines,” noting that it was possible that “strong economic conditions can partially reverse supply-side damage after it has occurred.”
More recently, she and her colleagues have said that they’re closing in on full employment, and she’s tiptoed closer to suggesting that slack has been absorbed, though she never declared total victory.
She said in January that the labour market was “reasonably close” to the committee’s maximum employment objective, for instance, and that the cyclical element of participation declines had “largely” disappeared.
