‘Fed’s Jerome Powell was early spotting labour market slack’

Bloomberg

Jerome Powell was an early adopter of the view that US unemployment could fall further than thought, but back then didn’t parlay that insight into a more dovish stance on interest rates.
Transcripts of Fed meetings in 2014 showed then-governor and now-Chairman Powell was already among the most optimistic Fed officials about how many Americans could be drawn back into the work force as the economy recovered.
Even so, he never took that optimism so far as to call for delaying the eventual liftoff of rates from near zero that began at the end of the following year.
Several times in 2014 Powell declared his belief that unemployment may be able to fall further than staff and other policy makers estimated before triggering an acceleration in inflation. For example, in March he pointed to the Federal Open Market Committee’s median estimate for full employment, then at 5.4% at a time when unemployment was at 6.7%.
“There are good reasons to think that labour-market slack may be even higher,” he said. “I would cite disproportionate decline of the labour-force participation rate below our estimate of trend and the unusually high level of those who are working part time for economic reasons.”

More Slack
Labour-market “slack” refers to the availability of would-be workers not only among those recorded as unemployed, but also among those who have stopped actively looking for jobs. Their return can translate into higher employment and labor-force participation levels without higher inflation. That’s exactly what’s happened in the US, where unemployment has fallen to a 50-year low of 3.5% but inflation has remained tepid.
Despite that insightful view, which he repeated through the year, Powell’s assessment on the direction of inflation was decidedly more in line with the committee — based on his judgment that continued job creation would eventually extinguish even his estimates of remaining slack.
“Given these baseline levels of economic growth and unemployment, I have projected a slightly faster return of inflation to the 2% objective,” Powell said in September. “Inflation will turn out to be more responsive to very low and, in fact, negative levels of slack that are in the baseline and in my forecast.”
The transcripts show that even for Fed policy makers open to the idea that the labour market might surprise economists, those same officials were slow to understand how unemployment’s implications for inflation had fundamentally changed.