Despite the sharp decline in the most widely watched measure of unemployment, “significant” remaining labor market slack and an accompanying “absence” of inflation pressure call for patience in reducing monetary stimulus, Boston Federal Reserve Bank President Eric Rosengren argued Wednesday.
Rosengren, who dissented when the Fed’s policymaking Federal Open Market Committee took its first “measured” step to scale back large-scale asset purchases in December, stopped short of calling for a halt or reversal of Fed “tapering” of “quantitative easing.”
But, with weather clouding interpretation of the jobs data, he said “this uncertainty provides an additional strong rationale for taking a patient approach to removing the monetary policy accommodation that the Federal Reserve has been deploying.”
After weather was blamed in part for surprisingly weak non-farm payroll gains of 75,000 in December and 113,000 in January, he predicted the February employment report “will also be difficult to interpret.”
Rosengren went on at some length to contend that the “U-3” unemployment rate, 6.6% as of January, greatly “understates” the amount of labor market slack in remarks prepared for delivery to the The Boston Economic Club.
Transcending the debate over whether the decline in labor force participation is mostly structural or cyclical, he noted the 7.3 million people who are working part-time but want to work full-time is 2.7 million more than in December 2007. And he said that number is “dramatically higher” than during the 1994 recession.
The FOMC has set a 6.5% unemployment “threshold” for considering hikes in the federal funds rate, although it has lately amended that “forward guidance” to say the funds rate will likely need to stay near zero “well past” the time when that threshold is penetrated.
Rosengren said “significant slack” will remain when the U-3 unemployment rate falls to 6.5%, noting the U-6 measure, which includes discouraged job seekers and involuntarily part-time workers, is roughly twice that level.
And he observed “the spread between the U-3 and U-6 measures of unemployment has increased dramatically since the start of the financial crisis.”
“To return to full utilization of labor as measured by this broader indicator, we will need stronger economic growth – which would pull workers out of unemployment into employment – but we will also need sufficient demand to see the re-employment of some of those marginally attached to the workforce and the conversion of many part-time workers to full-time workers,” he said.
Even with reference to U-3, he said the current rate of unemployment is far above what he considers a “full employment” level of 5.25%.
“Another indication of what I believe to be significant labor market slack is the absence of inflationary pressures,” he said, noting that inflation is running well below the Fed’s 2% target.
Rosengren concluded “such conditions call for a very patient approach to removing monetary policy accommodation, particularly given the softness in recent economic data … . Monetary policy should continue to be accommodative, supporting a return to full employment, given the very low inflation rates.”