MINNEAPOLIS (Reuters) - The U.S. unemployment rate may have room to fall further without leading to excessive inflation, Federal Reserve Vice Chairman Richard Clarida said on Tuesday in comments that could further solidify the central bank’s hesitancy to raise rates further.
The traditional tie between falling unemployment and rising inflation has clearly weakened, Clarida said, and the recent influx of workers returning to the labor force indicates there may be more “slack” in the economy than the headline 3.8 percent unemployment rate indicates.
The low unemployment rate “has been interpreted by many...as suggesting that the labor market is currently operating beyond full employment,” Clarida said in prepared remarks for a Minneapolis Federal Reserve bank conference on monetary policy and income inequality.
But the actual level of “full employment” is difficult to determine, Clarida said, and “the range of plausible estimates likely extends at least as low as the current level of the unemployment rate.”
The degree to which falling unemployment requires higher interest rates to guard against higher inflation is central to Fed analysis. Many, including President Donald Trump as well as many Democratic analysts, argue that the risk of inflation is so weak right now the Fed has no reason to intervene as unemployment falls.
Clarida’s remarks point in that direction as well, and suggest the Fed will look closely at measures of labor market slack beyond the unemployment rate as they determine their next move on interest rates. The Fed is currently taking a “patient” approach to further rate increases, in part because of the weak state of inflation.
Clarida is overseeing a broad review of the Fed’s system for setting monetary policy, and said that better understanding the nature of full employment would take an equal priority alongside assessing how to better achieve its 2 percent inflation goal.
For example, the number of workers returning to the labor force, whether previously discouraged from seeking work, retired, or just taking a break, surprised Fed officials and suggests a larger potential pool of workers for employers to draw on, he said.
Clarida noted that recent job gains also have helped narrow the elevated gap in unemployment rates between whites and racial and ethnic minorities, and have helped lower income groups make up ground economically.
“Wage increases in the past couple of years have been strongest for less-educated workers and for those at the lower end of the wage distribution,” Clarida noted.
Reporting by Howard Schneider; editing by Diane Craft