If you’ve noticed, the Fed has paid little attention to the Unemployment Rate as it relates to Fed tightening. You recall at one point just three years ago the target Unemployment Rate before the Fed would even consider raising the Fed Funds rate was 6.50% and reaffirmed in early 2014. But the rate did40 percent of unemployed quit looking indeed float below 6.50% and still no rate increase.

The most recent statistics showed unemployment fell to 5.4% just last month. Now however, the Fed is looking at job creation and wage gains. The rate matters less and it may be the reason the number is actually skewed. Rather, not skewed but the way the rate is calculated is altered when people start leaving the workforce. And according to an article today on cnbc.com, a full 40 percent of unemployed have simply given up looking for work.*

That matters because the unemployment rate takes into consideration the number of unemployed people who are actively looking for work. If someone is retired they’re not counted because they’re not looking for work. Individuals are actually surveyed when calculating unemployment numbers and one of the questions asked is whether or not they’re looking for a job or they quit looking. If they quit looking, the number of available workers shrinks. That will mean the unemployment rate will fall even if the very same number of workers are working each and every month.

So what happened to the 6.50% target? It was quietly ignored. The rate has fallen more than a full percentage point from the target rate and the Fed is still standing pat. The economy is moving but not with much fanfare and there are too many mixed signals on the economic front. Good news one day and not-so-good news the next. Bonds in general have been selling off so that could be a signal investors are becoming increasingly confident in the markets. The unemployment rate can continue to fall but still not provide the Fed with the confidence it might need if more and more workers simply quit looking for a job.

 

*cnbc.com May 20, 2015