Lower economic speed limit
There was no discussion of the “speed limit” issue in the July FOMC minutes. This is generally a “cyclical versus structural unemployment” issue.
Over the summer, the staff took down their estimates of further GDP growth because they viewed much of the unemployment we’re seeing as structural unemployment. In other words, many of the unemployed will stay unemployed even if the economy improves—simply because they don’t have the skills employers are looking for.
As a practical matter, this means that there’s less slack in the labor market than there initially appears to be and that we should start seeing wage inflation sooner. This is undoubtedly good news for people who already have a job. But it’s bad news for the economy as a whole. It means that rates will have to increase sooner rather than later. It also means that the long-term unemployed will remain that way and will consume less than they would if they had a job. This, in effect, lowers the “speed limit” of the economy—which is the level of GDP growth where inflation begins to kick in.
In the September and October meetings, the FOMC no longer discussed this issue. At any rate, we’ll find out more soon. The leading indicators of the labor market—initial jobless claims and job openings—are flashing green and hitting levels only associated with boom times. Companies are loath to lay people off, which is what the low initial jobless claims numbers tell you. And there’s demand for labor, which is what the job openings numbers tell you.
If we start to see a drop in unemployment coincident with an increase in the labor force participation rate, wage inflation pressures will be muted. That would keep rate hikes at bay for the moment. If unemployment drops and wages begin to rise without an increase in the labor force participation rate, that would be a signal for sooner rate hikes.