The term “maximum employment” is supposed to signify that as many Americans as possible have jobs. It’s the economic policymaker equivalent of taking a victory lap. So it’s far too early for the Federal Reserve Board to declare that the United States is, as its chair said this week, at “maximum employment.”
The nation still has not recovered 3.6 million jobs that were lost during the pandemic recession, and Black unemployment remains high. A lot of people are still missing from the workforce. Some economists even argue the true shortfall is closer to 5 million people after factoring in population growth and jobs that would have been added if not for the crisis.
Drive around any community in the United States right now and there is a deluge of “we’re hiring!” signs and businesses saying they have had to reduce hours because they do not have as many employees as before the pandemic. This is not ideal. And it’s not even back to pre-pandemic norms.
Yet Wednesday, Fed Chair Jerome H. Powell made it clear where he stands.
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“Most [Fed leaders] agree that labor market conditions are consistent with maximum employment,” said Mr. Powell, adding, “That is my personal view.”
The stock market started selling off sharply after he made those comments at a news conference. The Fed has two clear goals: to get as many people jobs as possible and to keep prices — inflation — low. Mr. Powell was basically putting a big check mark next to jobs and indicating the Fed’s focus is now fully on fighting inflation.
We certainly agree that the Fed needs to get serious about inflation. It’s at a 40-year high and appears to be getting only worse. But the Fed could have given a clear signal that it plans to raise interest rates several times this year without portraying the labor market as totally fine.
Yes, the labor market looks strong. The past year was one of the best for hiring, and recent months have seen record levels of job openings. The unemployment rate, at 3.9 percent, is also very low by historical standards. While there’s no exact definition of “maximum employment,” many economists believe it’s when the unemployment rate gets below about 4 percent. (It will never be zero percent because there will always be people changing jobs and it takes time to hire.)
But there’s a glaring problem: This has been the slowest recovery in labor force participation since World War II. The number of Americans working or looking for work is at levels not seen since the 1970s. Part of the reason the unemployment rate is so low is because millions of people are not looking for jobs because of health issues, child-care struggles and early retirement. The recovery won’t be complete until more people return to work.
Mr. Powell knows that words matter. Every sentence he utters (and even his facial expressions) is scrutinized. Using the term “maximum employment” right now was a mistake and an affront to millions of people who are not back to work.
The Fed needs to raise interest rates, but it also needs to be honest about this labor market.