“Mission accomplished” in monetary policy is a moving target. The Fed’s mandate of maximum employment and price stability exists within a dynamic economic system with diverse economic players. While we shouldn’t expect policymakers to hit a bullseye, we should expect them to use the most accurate and efficient tools available.
In the case of maximum employment, the Fed aims to achieve the fullest level of employment without spiking inflation. The sweet spot for maximum employment falls between 4.1% and 4.7% unemployment rate. Some unemployment, such as frictional or transient cyclical unemployment, supports our economy by stabilizing wages and thus attenuating inflation, hence why an unemployment rate closer to 0 is never the goal.
July’s aggregate unemployment rate logged in at 3.5%, well below the recommended maximum employment range. This level of unemployment screams “too hot—take action.” And indeed, the Fed heard the call. Already this year they’ve set the fastest pace of interest rate hikes in four decades to cool off the economy. September’s Federal Open Market Rates meeting will continue the trend. However, the meaning of the call changes if we look at the disaggregated data.
The folly of gender-ignorant indicators
When we deal in percentages that control for population growth, women’s labor force participation rate was 59.2% on the eve of the pandemic. As of Sep. 2, 2022, it’s 58.4%. That means the U.S. labor force has lost 1.067 million women since February 2020. If we include these missing women in August’s unemployment figures, women’s unemployment rate would be 4.6%, or at the upper limit of maximum employment.
That’s all women. For Black women, counting the 309,000 of them missing from the labor force since the start of the pandemic, their unemployment rate is 8.5%. For Latinas, counting the 252,000 of them missing from the labor force since the start of the pandemic, their unemployment rate is 6.1%. Perhaps economists shouldn’t have been so quick to herald the historic low headline 3.7% unemployment level for Latinas last month.
The disaggregated economic indicators aren’t saying “cool down". In some cases, they’re saying “heat up.” So how should we act on these seemingly conflicting signals without triggering undue chaos?
An equitable solution
Disaggregated data matters because it sharpens our view of the economy. A sharper view of the economy matters because it optimizes decision-making. For instance, if we brought back the 1.067 million women missing from the labor force since February 2020, we could close the worker-to-open-job gap by almost 25%.