All signs point to the Federal Reserve taking its first baby step to raise interest rates later this month, irrespective of what’s in tomorrow’s jobs report. But the jobs report will continue to bear watching as a critical determinant of the Fed’s pace of future rate changes.
Fed Chair Janet Yellen said in a speech yesterday that she’s not ready to “declare that the labor market has reached full employment,” pointing to three key indicators of remaining labor market slack, which should be familiar to followers of CBPP’s past job market analyses:
An even stronger labor market would bring people back into the labor force and increase the labor force participation rate (the share of the civilian population aged 16 and over in the labor force) and the employment-to-population ratio (the share of that population with a job). This can happen even without the unemployment rate falling further, although there looks to be room for that to happen too.
The Labor Department’s most comprehensive alternative unemployment measure (U-6), which incorporates not only the official unemployment rate but also marginally attached workers and those working part-time for economic reasons, remains above where it was at the start of the recession (see first chart) — in contrast to the unemployment rate alone, which is back to where it was at the start of the recession.
The Fed seems committed to making an initial rate hike this month. Yellen says, however, that the Fed isn’t on a pre-determined path for further rate changes. She observes that going forward it has more scope to deal with surprises calling for faster tightening than for unanticipated weakness and therefore should be cautious in raising rates further. Data in the monthly jobs report will continue to provide important evidence of how cautious the Fed should be.