Unpacking the Federal Reserve's Strategy Amidst Persistent Inflation and a Resilient Job Market

The Federal Reserve has a dual mandate: fostering maximum employment and ensuring stable prices. This could be achieved through its influence on the money supply and the adjustment of interest rates in response to the economy's fluctuations. Despite expectations for a rate cut, as I have consistently discussed since the onset of 2024, the current phase of stubborn inflation complicates this possibility.

Recent labour statistics have delivered a surprisingly positive twist, revealing a labour market pulsating with strength. This vigour is characterised by an uptick in job creation that exceeded analysts' forecasts last month, potentially giving the Fed more leeway to postpone interest rate reductions.

In the latest report, nonfarm payrolls swelled by 303,000 in March, a leap from February's readjusted 270,000, and surpassing the predicted 212,000. This development has been instrumental in tempering speculation over an imminent rate decrease, with trader expectations for a June cut dipping slightly.

Moreover, average hourly earnings maintained a steady climb of 0.3% month-on-month, aligning with projections. The unemployment rate took a slight dip to 3.8%, sustaining a sub-4% run for an impressive 26 months—the longest since the late '60s. Additionally, labour participation nudged up to 62.7%.

The surge in employment was predominantly seen in the healthcare, government, and construction sectors. Notably, the leisure and hospitality industry has regained its footing to pre-pandemic levels.

In financial markets, Crude Oil WTI concluded the week at a YTD peak of $86.73 for the year, while the US 10-year Bond wrapped at 4.40%.

*Crude Oil WTI Futures – May 24. YTD Chart

** Source: Investing.com

*United States 10-Year Bond Yield. YTD Chart

** Source: Investing.com

Broader Perspectives on Unemployment

The Labour Department’s Bureau of Labour Statistics (BLS) doesn't restrict itself to just the official unemployment figure. It broadens the narrative by offering alternative measures, including U-1 through U-6, which provide nuanced views of labour underutilisation.

U-1 tracks those unemployed for 15 weeks or more. As of February 2024, this was at 1.3%.
U-2 captures the percentage of the labour force who lost jobs or completed temporary jobs, sitting at 1.9%.
U-4 includes the unemployed plus discouraged workers—those open to work but who have ceased searching due to various discouragements, tallying up to 4.1%.
U-5 adds those marginally attached to the labour force to the U-4, leading to a rate of 4.7%.
U-6 is the broadest measure, encompassing the unemployed, the marginally attached, and those employed part-time for economic reasons, culminating in 7.3%.

Bureau of Labour Statistics Report

Source: Bureau of Labour Statistics (BLS)

These metrics are pivotal for a comprehensive understanding of the job market’s health

beyond the primary unemployment figure, offering a deeper dive into the complexities of labour availability and utilisation.

Associate Professor Mordechai Katash is an Associate Program Director at UBSS Melbourne CBD Campus.