By Howard Schneider

WASHINGTON (Reuters] – Years after the U.S. economic crisis, the unemployment rate dropped below 4% to lift the nation’s labor force participation. Federal Reserve officials hope for a similar result in their new projections, which combine a renewed fight with inflation with a historical run of low unemployment.

Analysts find this outlook contradictory. While a 3.5% unemployment rate for several years may seem to increase price pressures, it’s consistent with research that shows a lengthy lag between increasing employment and an eventual rise in labor supply.

Federal officials had hoped for a quick rebound in participation. It has not.

It appears that it is wired into U.S. central banks’s most recent economic projections. This allows for low unemployment and falling inflation. A policy interest rate which will remain below that level over the next years, however, would not actually limit economic activity.

It’s a scenario that seems to involve the Fed still viewing inflation as “transitory” even though that word disappeared from this week’s policy statement, and anticipating labor supply will improve and help keep prices at bay, said Vincent Reinhart, a former top Fed staffer and now the chief economist at Dreyfus & Mellon.

They still believe that the term ‘transitory’ is important, even though it’s no longer used. They are not trying to bring down inflation. He said that it is one which observes inflation falling.”

Reinhart indicated that Fed officials expect low unemployment and a slowdown in inflation. Reinhart further stated that Fed officials believe “labor force participation will increase and get back to prepandemic levels”, with an increased flow of workers helping to moderate wage and price rises.

The Fed’s December 14-15 policy meeting seemed to reflect a hawkish shift towards higher interest rates. It signaled that three rate increases were possible in 2022. This could be interpreted as the central bank abandoning the promise of maximum employment.

Jerome Powell, Fed Chair and post-meeting media conference speaker on Wednesday admitted that he was shocked by this year’s persistence and high level of inflation.

Fed officials planned on pursuing higher inflation as a way to counter years with lower inflation. They were able to get close to closing a decade of missing targets with one swift jump in the inflation.

LABOR FORCE MEMBERSHIP

Powell made another point, however: Powell said that the current price increase is different than expected. It is driven by dislocations left over from the coronavirus outbreak.

He said that although it was more challenging and took longer than expected, these problems should still be solved over time.

Problem number one is the low labor force participation rate. This dropped more than 3 percentage points during the outbreak of the pandemic. From 63.4% to 60%.2% before recovering quickly in the wake of the initial summer of health crises.

After that, it stagnated just below 62% and left the workforce with 1.6 million fewer people than at the pre-pandemic peak.

Former workers might have already retired. You might be waiting for better health. You might be the one who is waiting for child care.

Bart Hobijn (an economist who worked at both the New York Fed & San Francisco Fed, and is a professor at Arizona State University) presented a study at this year’s Fed’s top research conference. It showed that participation was not driven by people reentering the workforce, but rather by participants choosing to stay the course through periods of unemployment while still looking for employment.

Hobijn & Sahin observed that the rising labor market attachment took longer to manifest itself in the participation rates than it did to see the unemployment rate fall. They suggested that the complicated health-care issues and lag could have contributed to this delay.

Fed officials claimed that the Fed’s last decade-long recovery saw rising participation, which helped bring the economy to a desired condition where unemployment was low and wages rose while inflation was manageable.

Fed officials also predicted that the U.S. would return to an optimal state this week. They projected a 3.5% unemployment rate, which is only 15% since 1950.

The evidence suggests that to return to our previous position, it will require some time. Powell stated Wednesday that we require another long-term expansion. “We have had a shock in labor force participation which is not unwinding at the speed many expected…. We all would… expect that level of maximum unemployment that’s consistent and price stability would rise further over time. This could be done, for instance, through increased participation.

The Fed’s inflation “make up” https://graphics.reuters.com/USA-FED/INFLATION/zjvqkygmzvx/

The Fed’s inflation “make up” https://tmsnrt.rs/3EWunQd

Frequency of unemployment rates https://graphics.reuters.com/USA-FED/JOBS/xmpjonjjrvr/

Frequency of unemployment rates https://tmsnrt.rs/33nBSC1

Labor force (eventually) follows jobs https://graphics.reuters.com/USA-FED/JOBS/znpneeqebvl/

Labor force (eventually) follows jobs https://tmsnrt.rs/2XTgsJY

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