US Bond Market Week In Review: The Fed Doesn’t Want To Fall Behind The Curve

Fed presidents generally agree that the economy is at or near full employment.In Fed chair Yellen’s semi-annual Congressional testimony this week she made the following observations about the labor market:

In the labor market, job gains averaged 190,000 per month over the second half of 2016, and the number of jobs rose an additional 227,000 in January. Those gains bring the total increase in employment since its trough in early 2010 to nearly 16 million. In addition, the unemployment rate, which stood at 4.8 percent in January, is more than 5 percentage points lower than where it stood at its peak in 2010 and is now in line with the median of the Federal Open Market Committee (FOMC) participants’ estimates of its longer-run normal level. A broader measure of labor under-utilization, which includes those marginally attached to the labor force and people who are working part time but would like a full-time job, has also continued to improve over the past year.

Yellen focuses on the more commonly cited labor market numbers such as the unemployment rate, total payroll employment and U-6. These are similar indicators to those preferred by Richmond President Lacker:

Looking back at 2016, real GDP came in a touch below 2 percent. Employment growth slowed as well, from 226,000 jobs per month in 2015 to 187,000 jobs per month. But that rate of growth is still unsustainably high — we need less than half that rate to keep pace with population trends. The unemployment rate was 4.7 percent in December, a relatively low rate by historical standards. Although the unemployment rate ticked up slightly last month, to 4.8 percent, in general it has continued to decline the past few years.

In contrast, Fed President Rosengren prefers less-often cited labor market measures:

“The labor market has significantly improved during the recovery, and my own assessment is that there is very limited slack remaining,” he said, showing how the unemployment rate, quits rate, unemployment duration, and participation rate data all support this conclusion.“There is limited room for further tightening in labor markets before one might see more inflationary pressures.”