The marked slowdown in the rate at which the remaining slack in the labour market is being absorbed poses a big dilemma for the Fed. The standard unemployment rate has now been broadly unchanged at 5.0% for a full 12 months. The Fed needs to know why people are suddenly flocking back into the labour force and will that surge continue? If it persists and the unemployment rate remains stuck at 5.0% then Fed officials might be more willing to leave interest rates lower than they otherwise would have been, since the upward pressure on wage growth would presumably be a bit more modest. As the minutes of September’s FOMC meeting note, “the increase in labour force participation over the past year suggested that there could be greater scope for economic growth without putting undue pressure on labour markets.”
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