Mar 15, 2017

The workers Janet Yellen is leaving behind

Andrew Harnik/AP

It's all but certain the Janet Yellen and the FOMC will raise interest rates this afternoon, and the decision will tell us some important information about how Fed officials see the economy and the U.S. labor force.

Why this matters: Economists think severe recessions are particularly painful because the inflict long-term joblessness on workers, a state that leads to erosion of skills employers demand. It's a vicious cycle that creates a class of degraded workers for whom indefinite joblessness is a common fate. Rising interest rates now may create an economy that leaves those workers behind.

The Fed has kept monetary policy loose, hoping that demand would grow high enough that employers would take a chance on these workers and even invest in training that could get them up to speed. And it's worked:

Data: Bureau of Labor Statistics, Federal Reserve Bank of St. Louis; Chart: Andrew Witherspoon / Axios

A smaller share of those out of the labor force are finding jobs these days however, even with the Fed's policy of easy money. This, plus rising measures of wage growth, has convinced many observers that even though the labor force participation rate among workers 25-54 remains low, many of these folks are probably lost causes to the effects of the Great Recession. The Fed, by embarking on a course of rate hikes, is implicitly endorsing this view.

A good call?: One side says no — what's the point of raising rates when the labor market is improving but inflation is not yet a problem? The other says yes — if the Fed waits to see inflation, it will be too late, possibly forcing the Fed to trigger a recession as it accelerates its plans to raise rates.

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