Job seekers’ rising hopes seen prolonging low Fed rates

Stable Participation

The participation rate will stop falling and stabilize around 63.4%, Macroeconomic Advisers estimates, slowing the decline in unemployment. The jobless rate won’t reach the Fed’s 6.5% threshold until the second quarter of 2015, assuming monthly payroll gains of 190,000, according to the Macroeconomic Advisers forecast. That’s roughly the pace of job growth over the last 12 months.

If the participation rate rises by just half a percentage point to 64%, it would take average monthly payroll gains of 258,426 to drive the unemployment rate down to the 6.5% range over the next 18 months, according to a jobs calculation formula developed by economists at the Atlanta Fed.

“You definitely could not rule out that participation is going to rise some,” especially in a scenario of 3% to 3.5% economic growth Fed officials forecast for next year, said Stephen Oliner, resident scholar at the American Enterprise Institute, a Washington-based organization that promotes free-market policies. “That would put some upward pressure on the unemployment rate for a while.”

Examining Reasons

Even when the jobless rate does decline to 6.5%, that wouldn’t necessarily lead to higher borrowing costs. Federal Reserve Chairman Ben S. Bernanke told the House Financial Services Committee last week that policy makers would examine the reasons for a drop in unemployment.

“If a substantial part of the reductions in measured unemployment were judged to reflect cyclical declines in labor force participation rather than gains in employment, the committee would be unlikely to view a decline in unemployment to 6.5% as a sufficient reason to raise its target for the federal funds rate,” he told Representative Spencer Bachus, an Alabama Republican.

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