These constraints on the labor supply will almost certainly lessen soon. Some states have already phased out the federal supplemental unemployment compensation benefits. For others, these benefits will end in September. Similarly, schools will be back in session in a few months, allowing students to attend in person. When this happens, the labor force participation rate will rise, more people will go back to work and the number of unfilled job openings will fall. Even the sharp increase in retirees we have seen over the past year may not prove persistent. Some may decide to go back to work as job opportunities become more plentiful and rising wages make it more attractive to return to the workforce.
So what does this mean for the Fed and monetary policy? For now, it means waiting and watching. The unemployment rate and the size of the employment shortfall suggest there is considerable labor market slack. How much slack exists will come into better focus over the next few months, once the expiration of supplemental unemployment compensation benefits and the reopening of schools have their impacts.
We won’t have a firm grasp on where things stand until early November, which is when the October household and payroll employment reports become available.
This means that Fed officials are unlikely to know whether they have indeed made “substantial further progress” toward maximum sustainable employment until this fall. Until then, they are unlikely to tip their hand about the timing of the asset-purchase taper. However, the Federal Open Market Committee statement language may need adjusting earlier. After all, as progress is made the standard of “substantial further progress” eventually becomes unworkable. At some point, there is no longer room for “substantial further progress.”
Bill Dudley is a Bloomberg Opinion columnist. He is a senior research scholar at Princeton University’s Center for Economic Policy Studies. He served as president of the Federal Reserve Bank of New York from 2009 to 2018, and as vice chairman of the Federal Open Market Committee. He was previously chief U.S. economist at Goldman Sachs.