WASHINGTON – The Federal Reserve said Wednesday that the labor market still has plenty of room for improvement, even after a surprising drop in unemployment, bolstering the case for keeping interest rates low.
“A range of labor-market indicators suggests that there remains significant underutilization of labor resources,” the Federal Open Market Committee, or FOMC, said in a statement, dropping language that unemployment is “elevated.” The Fed also said inflation has risen closer to its goal.
The statement highlights broader measures of the labor market, such as weak wage growth and underemployment, that Fed Chairwoman Janet L. Yellen has emphasized as reasons for maintaining more than five years of near-zero rates.
“It reflects Chair Yellen’s firmly held belief that there’s still major slack in the labor market, and as part of their mandate, they need to continue to provide accommodation for some time,” said Terry Sheehan, an economics analyst at Stone & McCarthy Research Associates in Princeton, N.J.
Policymakers continued to trim monthly asset purchases that have pumped up the Fed’s balance sheet to a record $4.41 trillion. They tapered monthly bond buying to $25 billion in their sixth consecutive $10 billion cut, staying on pace to end the purchase program in October.
The FOMC repeated that it’s likely to reduce bond-buying in “further measured steps” and keep interest rates low for a “considerable time” after ending purchases.
“The likelihood of inflation running persistently below 2 percent has diminished somewhat,” the Fed also said.
“They are protecting their credibility” by flagging less risk that inflation will stay below their target, said Mark P. Vitner, senior economist at Wells Fargo Securities LLC in Charlotte, N.C.
Philadelphia Fed President Charles I. Plosser dissented, objecting that the guidance on the timing of a rate increase was “time dependent” and did not reflect “considerable economic progress.”
Yellen told lawmakers this month that while her view of the economy has turned “more positive,” she is concerned about signs of job-market “slack” such as low participation in the labor force. “We need to be careful to make sure that the economy is on a solid trajectory before we consider raising interest rates,” she said.