The Trouble With Full Employment

Figuring out when the economy has reached maximum employment is no easy thing. Just ask the Fed

- Matthew Boesler

Last year was humbling for the Federal Reserve. In 2019 policymakers were forced to unwind a series of interest-rate hikes they had implemented the year before, citing strains on the U.S. economy from President Trump’s trade wars and a global slowdown. In the process, the central bank appeared to be sacrificing its autonomy by caving into Trump’s relentless demands for cheap money. There was still another reason for the Fed’s reversal, one that goes to the heart of the institution’s dual mandate of ensuring full employment and stable prices. It had underestimated how many jobless Americans were still out there—not technically counted as unemployed but willing to work.

By the time the jobless rate dipped below 4% in the spring of 2018—for only the second time in a half-century—central bankers thought they had accomplished their goal of maximum employment. Their next challenge was to ensure the tight labor market didn’t trigger a so-called wage-price spiral. They began charting a course to raise interest rates high enough to discourage hiring. Yet, unexpectedly, inflation didn’t bubble up, even as unemployment continued to drift lower. It’s 3.5% now.