Boston Fed’s Collins: Central bank needs better view of full employment

By Howard Schneider

BOSTON (Reuters) – Improvements in labor supply that seem to occur as the overall job market gets tighter means Federal Reserve policymakers may need to worry less about inflation at such moments and let the benefits of strong employment spread to workers, Boston Fed president Susan Collins said Friday.

In both the 2010s and recently an unexpected jump in the number of people working or looking for work helped employment expand without boosting wage and other cost pressures. The Fed needs to better understand these developments, she said, to “operationalize” U.S. monetary policy that strives to keep inflation stable while maximizing employment.

“Recently, part of the move toward a better balance has come through an increase in labor supply. The labor force participation rate for prime-aged workers is higher today than it was just before the pandemic – a development that few expected even a year ago,” Collins said in remarks kicking off a two day labor market conference at the Boston Fed.

“If labor supply expands to meet demand in tight labor markets, then higher levels of economic activity in such times may not generate additional price pressures requiring tighter monetary policy.”

Collins did not tie her remarks to the Fed’s current policy debate over whether further interest rate increases will be needed to lower inflation to the Fed’s 2% target from its current level of around 3.4%. With inflation slowing, policymakers already appear to be leaning against any further rate increases.

But her remarks are relevant to the central bank’s upcoming discussion about how long high rates may need to stay in place, with officials including Fed chair Jerome Powell still arguing that the economy needs to grow at a level below its potential for some time for inflation to dependably decline.

Estimating “potential,” however, requires some sense of how many people might be willing to work under certain conditions. Underestimating that number makes the economy look closer to its limits for any given number of workers, and might cause Fed officials to want to needlessly try to constrain growth.

Avoiding that sort of tradeoff was the driving force behind revisions to the Fed’s monetary policy framework in 2020. Collins said the central bank still needed a better understanding of “the complexity of assessing full employment” when gaps in the jobless rate persist among racial groups, the pandemic has reshaped work rules and patterns, and the potential exists for non-monetary policies around job training or child care to further improve labor supply.

“Full employment has often been defined by referencing an unemployment rate. But no one statistic can adequately characterize the labor market, since aggregate numbers do not show the wide range of experiences across people, sectors, and places,” Collins said. “Unemployment rates that are persistently higher by race, or by place – as they have been for a long time – reflect underutilization of our country’s labor resources, and

that adversely affects national productivity and prosperity.”

(Reporting by Howard Schneider; Editing by Chizu Nomiyama)