One of the distinguish features of this economic recovery is slow decreasing in unemployment rate. The Fed has mandates to maximize employment in the context of low and stable inflation. In conducting the monetary stimulus, the Fed had initially used unemployment rate as a measurement to gauge the necessities of policy adjustment.
Beginning in December 2012, the Fed provided guidances on the path of federal funds rates based on the threshold of unemployment rate 6.4%. However in late 2013 and early 2014, as the unemployment rate number came down, the Fed quickly realized that the unemployment rate failed to capture the full picture of the labor market.
The labor market has been complicated by low work force participation and large amount of temporary jobs. The work force participation has dropped to 62.8% compared to 66% at pre-recession. Low level labor participation is attributed by
– baby boomer retiring
– skill erosion due to prolong joblessness
– young people staying school for longer
Even among those employed, there are large amount of people work on part time basis while they prefer to work full time. Due to fewer job opportunities, turn-over rate is low and many people are staying at less ideal jobs. Overall, the labor forces are not used as efficiently.
At March 2014 FOMC meeting, with the unemployment rate nearing the threshold that had been laid out earlier, the Fed revised its feedback measurement to use a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. A single measure is often susceptible to noises and a comprehensive measurement can reduce noises.