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Why the Fed Expects Unemployment to Fall to 3.6%

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Job market outlook changed from strong to solid

The FOMC (Federal Open Market Committee), as part of its statutory mandate, seeks to foster maximum employment and stable prices (TIP). The US unemployment rate moved above the 9% level during the period of economic recession between 2007 and 2010. The efforts of the Fed with its accommodative monetary policy and excessive money printing helped bring back unemployment below the target rate of 4.5%. Over the last 12 months, unemployment levels have fallen to a 17-year low of 4.1%. Improving economic conditions in the United States and corporate tax cuts have increased employment opportunities for the US workforce. The fall in unemployment and acceptable inflation growth have given the Fed enough reasons to start hiking interest rates in this business cycle.

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Projections for the employment market

The Summary of Economic Projections (or SEP) report released along with the March FOMC statement indicated that Fed members expect a further decline in the unemployment rate. According to the report, the median unemployment rate for 2018 was projected at 3.8%, and the median unemployment rate for 2019 and 2020 was projected at 3.6%, which is much lower than the long-run US unemployment rate of 4.5%.

Outlook for the US employment market

The outlook for the US jobs market remains robust. The recently published non-farm payrolls and the JOLTS (Job Openings and Labor Turnover Survey) indicated that the employment market continues to get stronger. Employers are facing a shortfall of skilled labor, which could force them to offer higher wages to attract workers. The recent equity market (VOO) correction in February 2018 was triggered by the increase in average hourly wages since the markets feared higher wages could lead to higher demand and thus a faster growth of inflation (VTIP). Many would suggest that we must start appreciating the lower unemployment rate rather than fearing higher inflation (SCHP) and interest rates. The Fed’s duty is to manage inflation (CPI) and the employment rate at optimal levels, and most people hope it will successfully do that.

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