No Tapering Soon if the Fed Looks at Labor; A 6.5% unemployment target isn't the only concern. The employment rate matters too, and it's still looking anemic.
The Federal Reserve's Sept. 18 decision to stay the course on its asset purchases surprised and confused many market participants, who felt the central bank had sent contradictory signals about its intentions. In fact, the Fed has behaved in a way completely consistent with Chairman Ben Bernanke's public comments, at least since July. A careful look at the labor market numbers suggests that if the Fed sticks to the chairman's words, there will be no significant tapering any time soon.</br></br>Before July, the Fed announced on a number of occasions that a 6.5% unemployment rate would indicate that it is time to start raising interest rates and winding down its easy-money policies. The unemployment rate has fallen significantly from its high of 10% in October 2009 to the mid-sevens. But the labor market is still sickly because, as I pointed out in these pages in June, the employment rate--the proportion of the working-age population that has jobs--has made little progress.</br></br>The employment rate is the best single indicator of labor-market health, and it is still hovering at around 58.5%, down significantly from its pre-recession levels of over 63%. The economy is adding jobs, but just barely staying ahead of population growth. Rather than making up for ground lost during the recession, the economy is still treading water.</br></br>Mr. Bernanke and other Fed governors are clearly aware of the distinction between the unemployment and employment rates. In his July 17 congressional testimony, Mr. Bernanke said that "if a substantial part of the reductions in measured unemployment were judged to reflect cyclical declines in labor force participation rather than gains in employment (my emphasis), the [Federal Open Market] Committee would be unlikely to view a decline in unemployment to 6.5% as a sufficient reason to raise its target for the federal funds rate." The jobs report for August showed the decline in labor-force participation and employment rates that the Fed feared.</br></br>On Sept. 18--following the FOMC's vote to continue its current pace of bond-buying--Mr. Bernanke reinforced the message. "The unemployment rate is not necessarily a great measure in all circumstances of the state of the labor market overall," he said. "We are looking for overall improvement in the labor market."