Last week the US central bank indicated it would leave short-term interest rates near zero until unemployment fell to at least 6.5 per cent, as long as inflation does not threaten to rise above 2.5 per cent.
It has also pledged to keep buying long-term securities unless the outlook for the labor market improves significantly.
An unprecedented drop in the per centage of the working-age population that is in the labor force has been the biggest factor behind the fall in the unemployment rate to 7.7 per cent last month from a peak of 10 per cent in October 2009.
The labor force participation rate is hovering near a 31-year low, a function of both poor labor market conditions and
baby boomers going into retirement. About 6.9 million people say they are out of the labor force but want a job and some of them could reenter the jobs market if economic conditions improve significantly.
ELEVATED JOBLESS RATE The San Francisco Fed’s paper said that based on historical averages, about 2.1 million could enter the jobs market.
If they moved back into the labor force over 1-1/2 years, the jobless rate could top 8 per cent into 2014, it said in an analysis published in the San Francisco Fed’s Economic Letter.
That’s higher than the most pessimistic forecast from all 19 Fed policymakers, which puts unemployment at 7.8 per cent by the fourth quarter of 2013.
“The unemployment rate could stay around 8 per cent as late as mid-2014, despite continued job growth,” wrote Mary Daly, associate director of research at the San Francisco Fed. “A stall in reducing the unemployment rate would undoubtedly be viewed as a significant disappointment.”
If discouraged workers take 3-1/2 years to return to the labor force, the unemployment rate could still be at its current 7.7 per cent at the end of next year, the analysis showed. All projections are based on the assumption that jobs continue to be created at the same pace they have been over the last two years.
If none of the 2.1 million were to enter the labor market, the unemployment rate would fall to 7.4 per cent by the end of next year. The economy added about 1.8 million jobs last year and employment growth this year has averaged 151,000 jobs per month.