Labor is not coming to the Fed's rescue

The COVID-19 outbreak caused a massive turmoil in the U.S. labor market. Some people were temporarily unemployed. Others left their jobs due to health issues or family circumstances. And more people chose to retire. 

Officials from the U.S. Federal Reserve (Fed) assumed that these swings in the labor market would eventually taper off. But November’s labor force participation rate hit only 62.1%. This indicator is consistent with January's value, being 1.3% lower than the pre-pandemic level. 

Jerome Powell noted that the regulator is recognizing a negative impact of slower labor growth on the U.S. economy and, in particular, on the central bank's functioning. Thus, fewer workers mean lower production rates. So, the Fed has to push interest rates higher in order to reduce demand in the country.

In fact, there are three methods of boosting the labor force, i.e. reaching adulthood, having migration influxes, or recruiting working-age citizens. But weak birth rates in the U.S., combined with pandemic restrictions on entry, have affected gains in the first two indicators. There has also been a reduction in jobs given the rising incidence of COVID-19.

Officials said there are several prerequisites for soaring wages in the country. And the biggest concern is that they are likely to be a major driver of higher inflation.