Long Term Perspective

When the economy is operating at full throttle, a falling unemployment rate frightens policymakers as they anticipate that rapidly rising wages will turn into runaway inflation. In fact, wage growth did accelerate in 2005 and over most of 2006 as the jobless rate headed lower. A rising jobless rate often alleviates wage pressures but is typically associated with economic recession. Federal Reserve policymakers aim for balanced growth with virtually no inflation.

Short Term Perspective

The unemployment rate has held steady over the last few months, coming in at 4.7 percent in November. The latest number is still not much above the cyclical low of 4.4 percent most recently seen in March of 2007.  The labor market currently is sending mixed signals as the unemployment rate is still low but job growth is modest. Average hourly earnings have eased slightly from the cyclical peak. Earnings were up 3.8 percent on a year-on-year basis in November, compared to up 4.3 percent for the cyclical peak set in December 2006.