Federal Reserve officials are talking more about how to define a fuzzy concept—maximum employment—that will heavily influence their thinking around how much longer to keep interest rates near zero.
Favorable hiring conditions, as seen in record levels of job openings and job quitting, suggest “job seekers should help the economy cover the considerable remaining ground to reach maximum employment,” Fed Chairman Jerome Powell said in a speech Friday at the Kansas City Fed’s annual economic policy symposium.
Assessing maximum employment, often described as the unemployment rate consistent with stable inflation, will be a delicate task for the Fed because officials concluded, in retrospect, that they overestimated it during the previous expansion and possibly raised interest rates too soon.
Their deliberations figure to be more difficult now because of how the Covid-19 pandemic has upended normal economic activity—for example, by making it harder to determine how many people who left the labor force last year will return.
“You still have the same challenge as last decade—in fact, a greater challenge—of determining what maximum employment looks like because of the immense disruption in the labor market,” said Julia Coronado, an economist who participated in Friday’s virtual presentations, where labor market dynamics were a major focus.
