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Extending Sell-Off

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In a blog post today titled "What Is Full Employment?", SF Fed Pres Daly (a dovish-leaning 2021 voter) writes that she sees "no reason to expect" factors such as fears of COVID, childcare, or unemployment benefits "to be permanent or even highly persistent features of the labor market".

  • As such, she sees prime-age (25-54) employment-to-population to continue rising as more and more people come back into the labor force and get jobs, comparing to the last decade's cycle.
  • Note that SF Fed research earlier this year pointed to labor market slack being "higher than implied by the current headline employment rate".
  • It's worth looking at the last cycle when the ratio rose 3pp between the bottom in 2009 (74.8%) and the first Fed hike in 2015 (ending that year at 77.4%, nearly 3pp below the 80.3% 2007 peak). By comparison, at 77.2% in June 2021, we're 3.3pp below the peak of 80.5% in Jan 2020.
  • That's arguably in nearly as "tight" shape than in 2015 when the Fed was hiking rates, if the comparison is simply current level vs pre-recession peak. And if simply comparing the magnitude of recovery: the ratio fell below 70% in April 2020, and has already recovered more than 7pp (a bigger recovery than was seen over the entire cycle last time).
  • So while employment may not yet be "full" by those standards, history suggests it doesn't have to be for the Fed to start hiking (even judging "full-ness" by Daly's standards).

Source: SF Fed