Fed officials debate state of labor market

For the millions of people still out of work, the labor market continues to look bleak, although unemployment numbers are improving. The true picture isn’t clear, even to Federal Reserve Board officials who continue to debate the true state of things.

Jon Hilsenrath had this story for the Wall Street Journal:

Federal Reserve Chairwoman Janet Yellen has argued consistently in recent months that labor markets are abundant with slack that will hold inflation and wages down. But she hasn’t convinced all her colleagues.

Minutes of the Fed’s April 29-30 policy meeting showed a lengthy debate on this subject and suggested labor-market slack will become an important battleground in the central bank’s coming discussions about how long to continue its low-interest-rate policies.

Many economists believe lots of slack in the labor market—large numbers of unemployed or underutilized workers—means the Fed can keep interest rates very low to help boost economic growth without generating high inflation. Conversely, they think that if there isn’t much slack, or that it decreases rapidly, the central bank should raise rates more quickly to keep price pressures under control.

The unemployment rate fell to 6.3% in April, not far from its long-run average of 5.8%. Ms. Yellen has argued other measures—such as the nation’s many part-time workers who want full-time work—represent slack holding wages down. While that view is broadly held at the Fed, the minutes showed she faced some pushback at the last meeting.

The Bloomberg coverage of the minutes by Jeff Kearns and Craig Torres focused on the risk of inflation:

Federal Reserve policy makers, weighing options for an eventual exit from extraordinary easing, said continued stimulus to push unemployment lower doesn’t risk sparking an undesirable jump in the inflation rate.

With inflation expected to remain well below its 2 percent goal, the Federal Open Market Committee doesn’t “face a trade-off between its employment and inflation objectives, and an expansion of aggregate demand would result in further progress relative to both objectives,” according to minutes of its April 29-30 meeting released today in Washington.

Fed officials also discussed the need to improve their guidance on the likely path of interest rates, and they heard a staff presentation on the tools that could eventually be used to control short-term borrowing costs once policy makers decide to lift them above zero.

Policy makers are watching progress toward their goal of full employment as they consider the timing of the first interest-rate increase since 2006. The Fed has said the benchmark rate is likely to stay low for a “considerable time” after it ends a bond-purchase program that’s set to wind down by late this year.

Paul Davidson of USA Today chose to focus on when and how the Fed would raise interest rates in his coverage of the release:

With the economy and job market picking up, the Federal Reserve is beginning to study how it will raise interest rates even while the financial system is flush with Fed money, according to Fed meeting minutes released Wednesday.

The minutes of the April 29-30 meeting show the central bank is shifting its attention from a bond-buying stimulus program that is expected to be phased out this year to the challenge of raising interest rates as the economy and inflation accelerate.

“Participants generally agreed that starting to consider the options for normalization at this meeting was prudent,” the minutes say.

Since the financial crisis, the Fed has bought more than $3 trillion in government bonds in an effort to inject money into the banking system and lower long-term interest rates to stimulate economic activity. Eventually, the securities will come off the Fed’s balance sheet as they mature or the central bank sells them but that could take years.

Meanwhile, many Fed policymakers have predicted the central bank will begin raising its benchmark short-term interest rate — near zero since the crisis — sometime next year. But ensuring that those rate hikes succeed in controlling inflation by triggering increases in bond yields, bank interest rates and other borrowing costs can be challenging with so much cash sloshing around the banking system.

The Reuters story by Michael Flaherty and Howard Schneider pointed out that the Fed was looking for ways to pull back from its low rate policy:

The discussion over how to exit the Fed’s highly accommodative policy, once the time comes, is the latest sign that the era of near-zero rates and heavy bond buying is drawing to a close. Having pumped trillions of dollars into the financial system, the Fed must now develop tools to siphon them out as part of the eventual decision to raise target rates.

“Participants generally agreed that starting to consider the options for normalization at this meeting was prudent,” the Fed said. It added that the discussion “did not imply that normalization would necessarily begin sometime soon.”

Investors expect the Fed to raise rates in the middle of next year at the earliest, and expectation that was little changed by the central bank’s latest minutes.

Sometimes it can be hard to determine what the Fed will focus on in terms of economic indicators. At this point, it seems the Fed itself is having trouble determining what unemployment rate will indicate it’s time to raise rates without stalling the economic recovery. If the media coverage is any indication, they’re trying to decide on a focus as well.