The Fed isn’t yet confident that it has done enough to return inflation to target, but equally not confident that it hasn’t done enough. Fundamentally, that’s because despite ongoing improvements, the labour market still looks tight by historical standards- as documented below. Leaving the FOMC in limbo: happy to pause but unwilling to rule out future rate hikes and not ready to even start thinking about rate cuts.
2023 has been a year of further improvement for the US labour market. The Covid shock to labour supply has almost entirely unwound, leaving the labour force almost back to where it would have been without the pandemic (Fig 1). Meanwhile, the pace of potential labour demand (civilian employment plus job openings) has slowed somewhat. Despite the improvement, the labour market remains historically tight, with potential demand for labour still 2% greater than the available workforce. (Fig 2)
Behind that headline, most of the key indicators the Fed watches have improved a bit further this year: since the end of last year the job vacancy rate has fallen from 7.1% to about 6%, the hiring rate has fallen from 4.4% to 4.1%, the Quits rate is down from 2.9% to 2.6% and nominal wage growth is down from 4.8% to 4.1% on the year (Figures 3-5).