MNI: Fed May Reach Job Goal Sooner As Participation Lags

Strong labor demand and a slow uptick in worker participation will put the Federal Reserve near full employment in the second half of next year, said economists from the last two presidential administrations and a former Fed visiting scholar, adding to pressure for tighter monetary policy.

"If you think we're maxed out on supply and there's no real way to increase that, then we have too much demand and we might have a threat of inflation," said Aaron Sojourner, a former member of the White House Council of Economic Advisers and a former visiting scholar at the Minneapolis Fed. Millions of sidelined workers and growth of the potential labor force even through the pandemic "suggests there's still plenty of room to improve supply," he said.

Labour supply is being held back by more people deciding to retire, staying at home to take care of family, or fearing a return to work and contracting Covid. That means the job market can be tight and arguably meet the Fed's goal of an inclusive recovery even with millions shy of the pre-pandemic trend. Fed officials say inflation criteria for interest-rate liftoff have already been met, so approaching full employment sooner than they predicted just a few months ago could justify tighter monetary policy.

It could take three to four years before reaching participation rates last seen in 2019 and 2020, sources told MNI. That will keep labor markets tight in the first half of 2022, a period Chair Jerome Powell pinpointed for assessing appropriate policy actions. Investors are betting on several 2022 rate hikes.

Participation rates may not return to where they were before the pandemic according to Vance Ginn, a former Office of Management and Budget chief economist in the Trump administration. "We've got baby boomers retiring every day, contributing to a lower rate than we would otherwise have, which was already low," he said, noting the Atlanta Fed's labor force participation dynamics tool.

REALISTIC GOALS

The next few payroll reports will show gains of around 400,000, Ginn said, which could put employment near pre-Covid levels in the middle of next year. Small increases in the labor force participation rate suggest further job market pressures, he said.

The pandemic has left the economy down 8 million workers from where it would have been pre-pandemic, driving down the rate of unemployed persons per job opening to a historically low 0.7 says Giorgio Primiceri, a Northwestern University professor and Chicago Fed consultant. "The labor market is now very tight," he said, adding that while returning to pre-pandemic strength is a reasonable goal, "the question is when is it realistic to achieve that goal."

New York Fed President John Williams recently cited research presented at the annual Jackson Hole meeting showing participation recovers slower than unemployment. "There are these two cycles in the labor market, there's the unemployment cycle and there's the participation cycle, and we just have to keep our eyes on employment and not just the one," he said when asked about broad and inclusive labor goals. (See: MNI: US Labor Shortage To Persist Despite Back-To-School Boost)

Labor participation has been in a tight range since June 2020 and was 61.6% in October, still 1.6pp short of pre-pandemic levels. Unemployment recovered to 4.6% from a high of 14.8% in April 2020.

"Given the early retirements, given changes in preferences, given a lot of the increase in implicit tax rates on work that we see with things like the Child Tax Credit, it's really tough for me to see us closing that participation gap anytime soon," said Tyler Goodspeed, a former acting chairman of the Council of Economic Advisers in the Trump administration.