The Federal Open Market Committee’s latest press release after its January 28 meeting reveals that it will maintain its 0% to 0.25% federal funds rate to achieve its targeted 5.2% to 5.5% unemployment rate and 2% inflation rate. The report states that economic conditions are improving, with increases in household spending and business investments. The labor market have further improved, but inflation rate have declined in light of plummeting oil prices. According to employment statistics, unemployment rates have dropped to 5.6% in December, meaning that the target unemployment rate is almost within target levels. The decline in inflation is attributed falling oil price, but this is temporary and the Committee expect that inflation will gradually rise after the transitory effects of low oil prices dissipate. The FOMC will closely monitor market conditions to determine when to raise the federal funds rate, adding that even after employment rate and inflation are near its target levels, it will keep the federal funds below normal levels in the long run. A slow but gradual increase in the federal funds rate is appropriate as it will allow the economy to slowly adjust.
The job market seems to be doing well, as unemployment rate is reaching optimal levels. However, this data is deceiving as the labor force participation rate have continued to decline.
According to the Federal Reserve Economic Data, the civilian labor force participation rate have hit lows not seen since 1978. This reflects that more and more people are still dropping out of the work force, causing unemployment rate to decrease. While there have been job gains in the economy, the decline in participation should be of more pressing concern. This data was left out of the press release, which seemed to have been overly positive about the state of our economy. In the future, the FOMC should also include this data so to not be misleading. This also raises the question of whether we have to decrease the 5.2% to 5.5% target unemployment rate. In any case, this evidence supports the FOMC’s decision to keep the federal funds rate low, as this will facilitate economic activity.
In the near future, however, inflation will remain low, while unemployment may further decrease. Factoring in the decrease in labor force participation, it might actually be good for the unemployment rate to decrease below 5% in the short run, though this would reduce competitiveness in the job market. Which is why more emphasis should be put into increasing the labor force participation rate, and should take a higher priority in policy-making.