Annual Report 2011

Sandra Pianalto, President and CEO

Maximum Employment: What We Know (and Don't Know) About the Labor Market. Read more

  1. What does President Pianalto say about the objectives of the dual mandate?
    • Pianalto said the Federal Reserve Act mandates that monetary policy be set to achieve stable prices over the long run as well as maximum sustainable employment. Further she said she does not view these objectives as competing with one another because, over the longer run, price stability is essential to achieving maximum sustainable employment.
  2. What is the concept that Pianalto refers to as the "natural rate of unemployment?" What do she and her staff estimate as the current natural rate of unemployment? Why doesn't the rate of unemployment hit zero?
    • The natural rate of unemployment is how low the unemployment rate could go and stay steady if the economy had fully adjusted to any disturbances (such as a recession). Pianalto and her staff estimate the natural rate of unemployment at about 6 percent. The current unemployment rate is 8.1 percent.
    •  Zero unemployment is not possible because people are always entering and leaving the workforce and some businesses fail or contract, while others start up or expand. Because it takes time to look for work, there will always be people who are looking for work and thus are unemployed. These labor market frictions are always present and keep the rate of unemployment above zero.
  3. Why is the unemployment rate still so high (8.1 percent) three years after the recession, and why may it take four more years for it to reach 6 percent?
    • Pianalto said we lost 9 million jobs during the recession, beyond the 6.5 million people who were already unemployed, but only regained about 3 million of the lost jobs. The economy is generating job openings very slowly. Output growth has been weak over the recovery and looks likely to stay moderate over the next several quarters. Finally, there are reasons to think our economy is matching workers to job openings at a slower pace than in the past. One reason the matching process may be slower is because of the demand for more specialized skills requiring higher levels of education and training. This makes it harder for employers to find candidates who meet the necessary requirements.
  4. There are some "unknown" aspects of labor market performance that Pianalto and her staff are monitoring closely, where conditions are historically unusual. Name two of them.
    • One issue that is not understood is whether the long spells of unemployment, sometimes exceeding two years, that many individuals are experiencing, sometime exceeding two years, will have a lasting impact on their employability and lifetime earnings. Some people do find work after a year or more of unemployment, but a long unemployment spell does lessen the likelihood of finding a job, and the number of people with more than a year of unemployment is unprecedented. Another less understood aspect of labor market conditions is wage growth, which looks to be moderate over the next few years, but it will be critical to watch how wage patterns develop. To date, larger gains seem isolated to narrow occupations with exceptionally strong demand relative to the number of available workers. However, if demand grew beyond these relatively focused occupations and skills without being easily filled by unemployed workers, we could see broader pressure on overall wage growth. At some point in each of the past expansions, wages have headed higher. But at this point, Pianalto and her staff have not seen evidence that wage acceleration is looming.
  5. So what does all of this mean for monetary policy?
    • Pianalto said she sees monetary policy remaining accommodative. Her outlook for unemployment and inflation is consistent with the federal funds rate staying low for some time.