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.
Become a client to read more
This is premium content that requires an active Capital Economics subscription to view.
Already have an account?
You may already have access to this premium content as part of a paid subscription.
Sign in to read the content in full or get details of how you can access it
Register for free
Sign up for a free account to gain:
- Unlock additional content
- Register for Capital Economics events
- Receive email updates and economist-curated newsletters
- Request a free trial of our services