The slowly disappearing US labor market slack

After the decision not to hike in September, the FOMC statement repeated that the Committee would like to see 'some further improvement' in the labor market and it would like to be 'reasonably confident' that inflation will move back to its 2 percent objective over the medium term. 

At the press conference, Chair Yellen stressed that the first would bolster the second. This underlined that, despite the market perception that China is driving, domestic factors are still playing an important role, the Fed wants a further reduction of labor market slack, because that would increase wage pressures and push up core inflation.

From this perspective, nonfarm payroll data are satisfactory as long as employment growth outweighs labor supply growth and labor market slack is reduced. This explains why the FOMC is willing to accept below 200K nonfarm payroll growth. 

However, it is the slack in the labor market that the Fed is primarily interested in. Employment growth is relevant because it is crucial to reducing slack and because it is the key indicator for the strength of the economic recovery, which is a precondition for reducing slack going forward.

But some others believed that labor market slack remained and that further progress was possible before labor market conditions were fully consistent with the Committee's objective of maximum employment. Members anticipated that economic activity was likely to continue to expand at a pace sufficient to lead to a further reduction in underutilization of labor resources. 

"The Employment Report for September, published two weeks after the FOMC meeting, while disappointing in terms of employment growth, did show a marked decline in the underemployment rate (U6) to 10.0% from 10.3%. So in terms of actual labor market slack, the Employment Report for September actually showed 'some further improvement'", says Rabo Bank.