Over the past few years observing changes in Federal Reserve interest rate policy has been a little like watching paint dry or grass grow…only not as exciting. That's because the Fed has not changed its benchmark Fed Funds rate since 2008 (Federal Reserve, FOMC). So with nothing else to talk about, Fed observers have focused on the minute changes in language that are included in Fed Policy statements. The minuscule revision in the July statement was the inclusion of the word “additional” to the “labor market improvements” that the Fed wants to see before finally pulling the trigger on its long-awaited rate increases. That should lead to a discussion of what kind of “additional” improvements those could be.
According to a good many of Main Street analysts, the labor market has already improved significantly over the past 5 years. During that time the unemployment rate has declined from 9.8% to just 5.3% (Federal Reserve Economic Data (FRED), St. Louis Fed). In the FOMC's June 2015 Summary of Economic Projections, Committee participants' estimates of the longer-run normal rate of unemployment had a central tendency of 5.0 to 5.2 percent. But that's not the kind of labor market success that has spurred Janet Yellen to action. She is looking for “additional improvements.” Since it is very unusual for the unemployment rate to fall below 5% (having done so in only ten years in the 45 years since 1970), it must be that she is looking for improvements in other employment metrics, like wage growth, labor force participation, and the ratio of full time to part time job creation. On those fronts there is very little to inspire confidence.
In late July the Dept. of Labor released the Employment Cost Index, which is considered the broadest measure of labor costs, that showed an increase of just .2% in the second quarter. Incredibly, this was the index's smallest quarterly increase since it was created back in 1982. The result came in far below the consensus expectation for an increase of .6%. If you believe as I do that the inflation measures that the government uses to calculate GDP growth are understated (its last GDP report assumed zero percent inflation) then such a minuscule change in wages would suggest that workers are losing ground, not gaining.
