Recent Retirements Throw Wrench Into Fed’s Economic Recovery Plans

Throughout the pandemic, officials have emphasized that they were likely to hold interest rates near zero until the labor market returns to full employment, when everyone who wants a job can find one without pushing inflation up uncontrollably.

Full employment has always been notoriously hard to measure, but now it has gotten harder still. Officials look at a range of indicators, including the number of jobs created and the share of the adult population either working or looking for a job.

The rapid rise in retirements translates to fewer people available to work—meaning the labor market could hit the full employment threshold at lower levels of employment and a lower labor-force participation rate than before the pandemic.

Over the past few months the labor market has been recovering, as the economy reopens. But there were still 7.6 million fewer jobs in May than before the pandemic. Because of the retirement wave, the labor market could reach full employment before that gap has been fully made up.

According to the Dallas Fed, roughly 1.5 million more people retired during the pandemic than would have been expected before the onset of Covid-19—meaning fewer available workers to take open jobs as the economy reopens.

“It is a different economy,” Mr. Powell said. “We don’t actually know exactly what labor-force participation will be as we go forward.” Federal Reserve officials took no action following their June 15-16 meeting but signaled they expect to raise interest rates by late 2023, sooner than they anticipated in March.

The trick for the Fed will be to determine when the labor market is once again at full steam. If officials refuse to take action until all those lost jobs come back, they risk waiting too long, allowing inflationary pressures to build in ways that could be painful to control.

On the other hand, if they act too soon, they could be strangling an economic expansion that still has room to run.

And it is hard to predict how older Americans will behave once the economy is growing strongly.

“Lesson number one is just to be careful about assessing maximum employment,” Mr. Powell said.

Some older people who were laid off last year may have decided to retire rather than look for new work in the middle of a pandemic. As jobs become plentiful again, they may be enticed to return to the labor market as seen after the last recession. Mr. Powell indicated Wednesday he wanted to give those workers every opportunity to return.

“We learned during the course of the last very long expansion that labor supply during a long expansion can exceed expectations,” he said.

Other people, however, may have decided to stop working after seeing their savings and their home value swell during the recent stock market boom and real-estate frenzy. People in this camp may not be interested in working again.

Write to David Harrison at [email protected]