Could Fed Announce US Economy’s Near Full Employment?

Federal Reserve officials have been emphasizing rapid progress in the labour market as they prepare to raise interest rates. Jerome Powell, the Federal Reserve chair, is likely to talk about how the strong labour market might interact with inflation this year.

Federal Reserve officials are expected to emphasize on Wednesday that their coming steps to slow economic support are based on more than just inflation worries: The job market has also staged a surprisingly rapid comeback.

The Fed is set to release its January monetary policy decision at 2 p.m., and some economists expect officials to say that the labour market is at or near the central bank’s full employment goal — setting the stage for upcoming rate increases.

The Fed is supposed to aim for both maximum employment and stable prices, and investors expect the central bank to lift borrowing costs from near-zero in March as the economy heals and as policymakers try to put a lid on rising costs.

“We expect the committee to conclude that the economy is at full employment and that it will ‘soon’ be appropriate raise the policy rate,” economists at Barclays wrote in a research note previewing the meeting.

Here are the labour market data points that central bankers have had in their sights — and where they stand compared with before the pandemic.

Unemployment is closing in on its pre-pandemic levels. The jobless rate, which measures people who are out of work but actively applying to jobs, declined to 3.9 percent in December — not far away from its 3.5 percent level before the pandemic. The rate jumped as high as 14.7 percent at the start of the pandemic, and its rapid descent has come as a big surprise to most economists.

Employment levels for people in their peak working years — 25 to 54 — has also been staging a rebound. About 79 percent of people in that age group work, down from 80.5 percent before the pandemic started.

Still, that remaining shortfall comes as about 1.6 million fewer adults in their prime employment years are working compared with February 2020. Health and child-care concerns could be keeping some people from looking for jobs. A large number of workers older than 55 are also missing, but it’s less clear if they will return or if they’ve retired.

Job openings and resignations remain way up, a sign that labour is in high demand as the supply of workers remains limited. The quit rate — which measures the number of people leaving jobs as a share of those employed — stood at a record-high 3 percent in November.

Wages are also rising briskly, another sign that employers want to find and retain workers. The Employment Cost Index, a measure of wages, salaries and benefits that the Fed watches closely, rose sharply in the third quarter and is expected to show another robust gain when it is released on Friday. Average hourly earnings are also growing quickly, though they are struggling to keep up with inflation for most people.

Inflation will also be in focus. Jerome H. Powell, the Fed chair, is likely to talk about how the strong labour market might interact with inflation this year. Wage growth never really boosted inflation in a big way during the pre-pandemic business cycle, but prices are now rising quickly in some labour-intensive sectors, including restaurants and personal care services. Companies regularly talk about passing higher labour costs onto consumers.

Wage rates have increased meaningfully, and in percentage terms business have experienced double-digit wage rate increases as they have raised wages to attract and retain sufficient staff to operate their restaurants at near-normal operating hours. Pricing adjustments and productivity improvements have been introduced to mitigate some of the labour cost inflation.