The Fed is done basically using the unemployment rate to guide monetary policy.
Last December, the Fed ditched its long-held outline that it would keep interest rates near 0% as long as unemployment remained above 6.5%.
With that announcement, the Fed, said, “it will likely be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5%.”
And while the Fed had always said it would consider “additional measures of labour market conditions” in determining interest rates, its language change in December indicated that no specific number would “trigger” an interest rate hike.
And as the unemployment rate has fallen to 6.1% and interest rates remain unchanged, the Fed has continued to emphasise this stance.
Following today’s policy announcement, and ahead of Friday’s July jobs report, Chris Rupkey at Bank of Tokyo-Mitsubishi spelled out what he sees as the Fed’s thinking on this issue more fully.
“Meanwhile, the unemployment rate, the single best indicator of the labour markets, has been further demoted as a policy guide. Looks like Yellen pulling a fast one here, delaying the exit Bernanke-style. Last meeting they said labour market indicators generally showed further improvement. The unemployment rate, though lower, remains elevated. This meeting labour market conditions improved, with the unemployment rate declining further. However, a range of labour market indicators suggests there remains significant underutilization of labour resources.”
In today’s policy statement, the Fed said, “a range of labour market indicators suggests that there remains significant underutilization of labour resources.”
In short, despite last month’s jobs report that showed the economy added 288,000 nonfarm payrolls June as the unemployment rate fell to 6.1%, its lowest level since September 2008, the Fed isn’t convinced the labour market is all that healthy.
However, the labour force participation rate remains elevated, wage growth isn’t outpacing inflation, and there are still 7.5 million involuntary part-time workers.
The BLS is set to release the June jobs report Friday morning, but it will take more than good headline numbers to impress the Fed.