Fed Chases Mysterious Goal of Full Employment

The U.S. central bank has a dual mandate to promote full employment and price stability, which may seem straightforward but has proved challenging during the current economic expansion.

Historically, inflation was the more elusive of the Federal Reserve’s dual goals, but now it seems predicting full employment has proven just as difficult. In fact, economists can’t even agree on what constitutes full employment in today’s economy.

What Is Full Employment?

The U.S. economy has seen a record 128 months of economic expansion and more than 2 million jobs created annually for the last nine years. So it’s no surprise the unemployment rate stands at 3.5 percent—nearly matching a 60-year low of 3.4 percent that dates back to the 1960s. For decades, the natural long-run unemployment rate was thought to be near 4.6 percent, but the recent recovery has proven this benchmark is too high.

It seems the Fed underestimated how many jobless Americans wanted to work. According to the U.S. Bureau of Labor Statistics (BLS), since 2015 the biggest employment gains among Americans aged 25 to 54 has come not from those counted as unemployed or as discouraged but those who said they weren’t even looking for work. The percentage has fallen, but is still estimated at 15.9 percent for those individuals who say they don’t want a job. That’s well above the 1995–2007 average of 14.7 percent, suggesting there is still additional slack in the labor market according to the BLS.

Labor Market: Strong vs. Tight

Fed Chair Jerome Powell has begun describing the labor market as strong but not tight. If it were tight, we would see average hourly earnings spike upward. Instead, it’s been challenging for wages just to get close to a 3 percent increase on an annualized basis throughout 2019.

While the unemployment rate may still have room to fall, it is clear we are getting close to the real low. Economists see nonfarm payrolls moderating from 178,000 to 127,000 this year. Look for businesses to start paring their hiring spree as the economy is forecast to slow in 2020.