An incorrect dial?

WITH today's good news from the Labour Department's jobs report, markets are pondering when the Federal Reserve’s first rate hike might take place. The Fed has said that it will begin raising short-term interest rates once the economy is starting to reach full employment and inflation no more than 2%. With inflation running below target, the labour market is likely to factor heavily in the Fed’s decision.

One key indicator to assess the health of this is America's unemployment rate. But this may be less useful now than it once was. Although the number of jobless Americans has fallen, the share of the working-age population in the labour force has also dropped considerably, from 66% before the financial crisis to less than 63% now. Temporary factors have affected the statistics, but much of the change has been driven by structural factors, such as retirement of the baby-boomer generation and rising college enrollment. These developments may explain why, as the unemployment rate has fallen from 10% in 2009 to 5.4% today, the Fed’s target...Continue reading