How Close Is the U.S. to Full Employment? Trump and Yellen Disagree

Trump's job goals are rubbing up against the Fed's determination to keep inflation under control.

Job seekers review lists of companies at a job fair in Los Angeles.

Photographer: Patrick T. Fallon/Bloomberg

How many more jobs can the U.S. economy add before it runs out of ready, willing, and able workers? There's no more important debate right now, and key players disagree on how much slack remains in the labor market before employment growth ignites unacceptably high wage hikes and inflation.

President Donald Trump

Trump exulted over the better-than-expected increase of 235,000 jobs in February, casting aside his previous doubts about the reliability of Bureau of Labor Statistics data. Officially, the White House committed earlier this year to creating 25 million jobs over the next decade, a period that would extend even beyond a second Trump term. That's an average of more than 200,000 jobs per month. The president appears to hopes to achieve that target by raising the economy's growth rate to 4 percent, although more recently Treasury Secretary Steve Mnuchin has used a figure of around 3 percent.

The problem is that while 200,000 monthly job growth is possible when the economy is still rebounding from a period of underemployment, it becomes far more difficult from here on in. 

Federal Reserve Chair Janet Yellen

Yellen may be emerging as one of Trump's biggest headaches. During the presidential campaign, Trump said the Fed's decision to keep interest rates low had inflated a "big, fat, ugly bubble." But Trump isn't complaining any more that interest rates are too low. He needs low rates to stimulate the growth he's promised. Now it's Yellen who's nudging rates higher to keep the economy from overheating.

In a speech earlier this month, Yellen said she believes the long-run increase in the labor force is 75,000 to 125,000 a month—which, if so, would quickly make it impossible to increase employment by more than 200,000 a month. After the decision on March 15 to raise the federal funds rate a quarter point, Yellen told reporters, "We think we're moving along the same course we've been on, but it is one that involves gradual tightening in the labor market." She added: "There's some evidence that wage growth is gradually moving up."

Message: Don't expect the Fed to stand aside and watch Trump try to gun the economy above its speed limit.

Minneapolis Federal Reserve President Neel Kashkari

Kashkari is interesting because he's the only member of the Federal Open Market Committee who dissented from the vote to raise the federal funds rate. There's evidence from a recent speech that Kashkari is concerned for those who remain unemployed and might stay that way if the Fed throttles back on growth.  

On Friday, Kashkari released a statement explaining his dissent. Most of it covered standard monetary policy considerations—inflation is still below the Fed's target, he argued, and there's more slack in the job market than some people think. But Kashkari did echo a point he made in January in a speech to the Minneapolis Urban League. His statement today said: "We also know that the aggregate national [unemployment-rate] averages don’t highlight the serious challenges individual communities are experiencing. For example, today while the headline unemployment rate for all Americans is 4.7 percent, it is 8.1 percent for African Americans and 5.6 percent for Hispanics."

Trump is gung-ho for massive job growth. Yellen believes the economy is already close to full employment. Kashkari falls somewhere between the two of them. This is getting interesting.

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