Drop in participation rate more structural than cyclical

The push by the Fed to delay tapering its asset purchases and possibly to lower its unemployment rate threshold suggests that officials expect the participation rate to rebound. We're not convinced, however, and suspect that the aging of the population will drive the participation rate even lower over the next five years. If we are right, the Fed might eventually find itself in a bind, as real earnings growth begins to pick up while it is still committed to leaving interest rates at near-zero. As a result, the Fed would be forced to choose between risking its credibility by raising rates more aggressively or allowing inflation to climb above the 2% target.