Over the past few years observing changes in Federal Reserve interest rate policy has been a little like watching paint dry or grass grow…only not as exciting. That’s because the Fed has not changed its benchmark Fed Funds rate since 2008 (Federal Reserve, FOMC). So with nothing else to talk about, Fed observers have focused on the minute changes in language that are included in Fed Policy statements. The minuscule revision in the July statement was the inclusion of the word “additional” to the “labor market improvements” that the Fed wants to see before finally pulling the trigger on its long-awaited rate increases. That should lead to a discussion of what kind of “additional” improvements those could be.
As the unemployment rate has crept steadily downward, the participation rate has moved down with it. In fact, more people have dropped out of the labor force in recent years than have actually found jobs. In June, a staggering 640,000 Americans gave up on job hunting (Bureau of Labor Statistics, 7/2/15), pushing the participation rate down to 62.6%, the lowest figure since 1977 (FRED, St. Louis Fed). And contrary to the spin put on by the White House Council of Economic Advisers, these are not retiring baby boomers. Older people are actually staying in the workforce longer. Rather, these are prime age workers who have simply given up looking for work.