Since adopting a new approach to U.S. monetary policy weighted towards ensuring a strong labor market, Federal Reserve officials have been reluctant to define key terms like "maximum employment," arguing they did not want to prejudge how many jobs the economy could produce but feel their way toward that end.
They are hesitant no longer, and data on Friday showing the unemployment rate fell to 3.9% in December is likely to confirm the growing sense at the central bank that its mission on jobs is finished -- despite millions of positions still missing from before the coronavirus pandemic and large shortfalls in women's employment particularly.
The U.S. Labor Department's latest monthly jobs report showed a slowdown in hiring last month, with only 199,000 positions added.
But it also bolstered the case, laid out in the minutes policy meeting, for why Fed officials feel the current job market is "very tight" and poised for "rapid progress" to their maximum employment goal -- clearing the way for the central bank to raise interest rates perhaps as soon as March.
Despite the weak job creation last month, wages surged and the unemployment rate fell below the 4% level that Fed officials feel is sustainable, and even further below the 4.3% rate policymakers expected by the end of 2021.
"There is nothing here to dissuade the Fed from raising rates in March" and trimming its balance sheet soon after, wrote Karim Basta, chief economist for III Capital Management.
22 Million Jobs Disappeared
In the context of the discussion underway since the start of the pandemic, when more than 22 million jobs disappeared in a collapse that fell heaviest on lower-income workers and racial and ethnic minorities, the minutes showed the limits of how far the Fed is willing to go in ensuring the jobs recovery is "broad and inclusive" as well as complete.
The difficulties that remain in the job market, Fed officials said in their discussions, now have less to do with monetary policy and more to do with ongoing disruptions from COVID-19 -- factors like school reopenings, child care and health conditions -- that it cannot influence. Workers may wait longer to take jobs again, they acknowledged, than had been expected.
Left unsaid was the fact that through December, some 2.8 million fewer people were employed than in February of 2020, just before the pandemic, as measured by the Labor Department's monthly survey of households, a gap Fed Chair Jerome Powell had all but promised would be erased. And the shortfalls are disproportionate among women and the less educated, gaps that the December jobs report did little to close.
The jobs recovery has also not been even geographically. Only about a dozen states -- clustered in the Southeast and the Mountain West -- have regained pre-pandemic levels of employment.
In the Northeast and through much of the industrial Midwest, employment in some states remains 5% or more below pre-pandemic peaks.
Why the Rush?
The Fed's heightened emphasis on jobs, adopted in August of 2020, was crafted at a moment when inflation was nonexistent -- and had been for most of the previous decade. Officials were convinced, at that point, that the central bank had erred in the past by not encouraging more job growth and instead had raised interest rates even without a clear inflation risk.
The Fed was determined not to make that mistake again. But when inflation took off last year it became a potential constraint on the central bank's ability to let the economy run unfettered.
Keeping prices under control is a core Fed objective. Now, even at the risk of slowing economic growth and hiring, the central bank feels it needs to be ready to tighten financial conditions or risk a worse and more persistent outbreak of price increases, an outcome that could prove equally harmful to the lower-income households disproportionately affected by pandemic-related job losses.
Just as the surge in inflation surprised the Fed, so did the behavior of workers, who have not flocked into the record number of open positions at the pace expected.
Workers Coming Back Slowly
The U.S. labor force participation rate is only slowly climbing back towards its pre-pandemic level, and some Fed officials are skeptical it will every fully recover. St. Louis Fed President James Bullard, for one, argues the participation rate should no longer be seen as unusually low given its prevailing downward trend over the previous two decades.
Moreover, there are now more than 1.5 jobs for every person declaring themselves unemployed - a record.
It is data like that which has brought the Fed close to declaring its work on the job front done. Though the remaining gaps are notable, even those who have followed the labor debate closest and pushed the central bank to be more aggressive on employment say officials may have a point.
If the job market in some parts of the country remains out of line, for example, there is not much Fed policy can do about it, and likewise if the virus is making people reluctant or unable to go back to jobs.
"This has been a strange enough and big enough shock that they have to be more flexible," said Josh Bivens, research director at the Economic Policy Institute. While Bivens said the Fed's unwillingness to run a "hot" economy during the sluggish recovery from the 2007-2009 financial crisis and recession was "infuriating," he agreed this time is different.
"I don't think they are foreclosing the possibility that lots of jobs could come back," Bivens said. "It is not the case, as in 2017, that all the risks are on one side. I always think inflation risk is overdone, but it is not zero anymore."
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