The Fed's 6.5 Percent Jobless Threshold May Be a Long Time Coming

What the far-off 6.5 percent threshold says about the sorry state of the job market.


It's jobs week once again, and four years since the end of the recession, everyone is still wondering how long until the jobs market finally looks healthy again. A little math and a look at the Fed's criteria for easing off the stimulus gas pedal reveals the answer: It's going to be a long while.

A new analysis shows that even if jobs continue to grow at the steady clip that they've shown in the first half of this year – around 189,000 new jobs per month – it would be roughly another year and a half before the unemployment hit the 6.5 percent threshold that the Federal Reserve has set for removing the low-interest rate policies boosting the economy, according to Hamilton Place Strategies, a Washington, D.C. communications firm. If the pace of growth were to ease off even by 20,000 jobs per month, it would be another two years until the jobless rate hit that point.

Given the fiscal headwinds of sequestration cuts still plaguing the economy, monthly job growth is looking poised to stay just below 200,000 for a while longer, says one analyst.

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"We've been kind of middling in this area for the last two years," says Russ Grote, senior analyst at Hamilton Place. "Given fiscal contraction we're expecting to see over the next year, the rest of the year it's hard to see where any surprise would be on those numbers."

The Federal Reserve has communicated that it expects to hold the federal funds rate, the interest rate at which banks borrow from each other, near zero as long as unemployment remains at or above 6.5 percent and inflation is at or below 2.5 percent. This near-zero interest policy, has come alongside quantitative easing, a program of asset buys also intended to stimulate growth. The Fed has already communicated it will end its monthly asset buys, known at QE3, before it raises the federal funds rate.

What does it mean if it's another two years until the Fed is ready to ease off the stimulus? It first of all communicates that even with central bank assistance, an already-long jobs recovery is looking to be even longer. The below chart shows just how abnormally long the job recovery has been:

The job losses from the start of the employment recession, in percentage terms, compared to previous post WWII recessions.

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In addition, the fact that the threshold is at 6.5 percent may also signal that the job market is simply not what it once was. Greater efficiency in the form of robots, computers, and automation have reduced the need for labor in recent years, which may have fundamentally shifted the jobless rate signaling "full employment" upward, says one analyst.

"What is the level of full employment in an economy where over the last several years a fair amount of human capital has been replaced by physical capital?" asks Guy LeBas, managing director of fixed income strategy at Janney Capital Markets. "There is a belief among the Fed that 6.5 percent represents a good level, whereas 10 years ago it would not have been considered a good level."

That doesn't mean the jobless rate can't get below 6.5 percent; that threshold may simply be the Fed's marker for when it should back off the stimulus before the economy overheats. However, where that threshold is signals that what has been a long, difficult recovery slog is going to stay that way for some time.

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