WASHINGTON — The Federal Reserve is making modest progress in its push to reduce the unemployment rate. But that is not the jobs goal that Congress actually established for the Fed. The central bank is supposed to be maximizing employment. And on that front, it is not making progress.
The share of U.S. adults with jobs has hovered around 58.5 percent for more than three years, roughly 5 percentage points below its pre-recession peak. Job creation has merely kept pace with population growth. The unemployment rate, now 7.6 percent, has fallen mostly because people stopped looking for work.
There is little sign, however, that Fed officials are considering an expansion of their 4-year-old stimulus campaign as the Fed’s policymaking committee prepares to convene today and Wednesday in Washington.
“We are seeing an impact from our policies,” Eric S. Rosengren, the Federal Reserve Bank of Boston president, said in a recent interview. “I think we’re pushing the interest-sensitive sector about as far as we’re going to be able to push it at this time.”
Fed officials backed away from talk of an early retreat from the current program of asset purchases — $85 billion a month in Treasury and mortgage-backed securities — after economic growth and inflation both rose more slowly than expected in the first quarter. The Fed’s preferred inflation gauge rose 1.2 percent, below its 2 percent target. But that is as far as the pendulum has swung.
The Fed’s chairman, Ben Bernanke, and his allies point to increased sales of homes and autos and the rising stock market as evidence that the asset purchases are working.
“After reviewing the efficacy and costs of this program, I have concluded that the efficacy has been as high or higher than I expected at the onset of the program and the costs the same or lower,” William C. Dudley, president of the Federal Reserve Bank of New York, said in a recent speech.
But there are several reasons that officials remain reluctant to do more. The benefits of additional asset purchases appear modest, at best. The consequences of buying more bonds are uncertain. And officials are frustrated that their monetary policy is being forced to play a role that most economists and Fed officials say could be more easily and effectively performed by fiscal policy.
Another reason the Fed is not embracing new measures is that it already has tied the duration of low interest rates to the unemployment rate. The Fed said in December that it intended to hold interest rates near zero at least as long as the unemployment rate remained higher than 6.5 percent, provided that inflation remained under control. The theory is that the economy will get as much stimulus as it needs.
“Communications from Fed leadership cast some doubt on the appetite of the key policymakers for increasing the monthly flow of purchases,” Michael Feroli, chief U.S. economist at JPMorgan Chase, wrote in an analysis of the coming meeting of the Federal Open Market Committee. “If the FOMC were to increase total purchases, they would prefer to do so by lengthening the time period over which they purchase $85 billion per month, rather than by increasing the monthly pace of those purchases.”
The Fed has good reasons for focusing on the unemployment rate. Historically, as people looking for jobs find work, people sitting at home start looking, so that total employment increases as the unemployment rate declines.
But recent research by two Fed economists suggests the current plan will not work if the Fed begins to reduce its efforts when unemployment falls lower than 6.5 percent, because that is not low enough to draw people into the job market.
The economists, Christopher J. Erceg and Andrew T. Levin, calculated that the number of people who wanted jobs but were not looking now exceeded the number actively searching.
“It’s safe to ignore the participation rate during normal times,” Levin said recently. “Our message is that it may not be safe to ignore it now.”