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The Fed has two jobs: Keeping inflation at 2%, and ensuring full employment. But what does full employment mean? According to Minneapolis Fed president Neel Kashkari, we're clearly not there yet — despite the fact that the unemployment rate is at a 50-year low of 3.5%.

Why it matters: If we're not at full employment, and inflation remains below the 2% target rate (as it does), then the Fed has little choice but to step on the gas.

Until we see wage growth net of productivity climbing at above 2%, then we're not really at maximum employment.
— Minneapolis Federal Reserve Bank president Neel Kashkari, in an interview with Axios

By the numbers: Hourly wages were $27.91 in June, up 3.2% from a year previously. (They've since decelerated a bit, with September's data showing earnings growth of 2.9%.) Productivity, meanwhile, was growing at a 1.8% pace in June. Which means that wage growth after accounting for productivity is well below the Fed's 2% inflation target.

  • The U.S. won't be at full employment, says Kashkari, until that number rises to above 2%.

What they're saying: Kashkari tells Axios that the headline unemployment rate is "almost useless" in determining whether the U.S. economy is at full employment.

  • The unemployment rate only counts people who are actively seeking work, but most of the new jobs being created are going to people who weren't actively seeking work during the previous month — people who didn't count as unemployed.
  • So the unemployment rate doesn't give a good indication of how many more people the economy can gainfully employ.
  • Instead, Kashkari likes to look at wage growth. "We're trying to assess supply and demand in the market," he says. "The best way of assessing supply and demand in the market is to look at the price. The price of labor is wage growth. And until we see wage growth net of productivity climbing at above 2%, we're not really at maximum employment yet."

The big picture: Kashkari is a noted dove, and it's not clear that other Fed officials would agree entirely with his analysis. But it's undeniable that wage growth is low.

  • If Americans started earning more money, the Fed would likely welcome that as a sign of economic health, rather than worrying that it might start causing too much inflation.

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