Unemployment Falling for Wrong Reason Creates Fed Predicament

Labor-force participation -- the share of working-age people either holding a job or looking for one -- stands at a 35-year low.

The reduced workforce “poses a problem for the Fed,” said Roberto Perli, a former central bank official who is now a partner at Cornerstone Macro LP in Washington. “The unemployment rate is coming down faster than the Fed thought, but it’s not declining for the right reason.”

The jobless rate is important because Chairman Ben S. Bernanke and his colleagues have established it as the lodestar for policy. Bernanke has said he expects the Fed to complete its asset-purchase program in the middle of next year when unemployment is around 7 percent.

So long as inflation remains contained, the central bank has said it won’t even consider raising its benchmark interest rate until unemployment falls to 6.5 percent. The Fed cut its target for the overnight interbank rate effectively to zero in December 2008 and has held it at that record low.

Read More: www.bloomberg.com/news/2013-09-09/unemployment-falling-for-wrong-reason-creates-fed-predicament.html