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FOMC Vice Chairman Richard Clarida stated that the rate of unemployment in the US could fall further yet without leading to excessive inflation. Clarida made statements at a Minneapolis bank conference on Tuesday evening which fall in line with the Federal Reserve’s current stance of pausing interest rates.

Key Takeaways

• Clairida stated that the link between unemployment and rising inflation has weakened.
• He pointed out that the increased rate of workers returning to the workforce indicates that there may be room for a lower rate of unemployment than the current 3.8%.
• At the conference on monetary policy and income inequality, Clarida made a note of the shrinking gap in unemployment between whites and racial and ethnic minorities.

Richard Clarida commented on the term “full employment,” stating that the low unemployment rate has led many to believe that the labor market is “currently operating beyond full employment.” He pointed out that it’s difficult to identify the exact level of full employment, saying that “the range of plausible estimates likely extends at least as low as the current level of the unemployment rate.”

Unemployment and Inflation

Falling unemployment tends to create inflation pressure, leading to the central bank to raise interest rates as an economic safeguard. However, monetary policy in this area is not an exact science, and depends on a number of factors to be considered by policymakers. US President Donald Trump’s stance is that the risk of inflation is currently negligible, and that the Fed should adopt a hands-off approach when it comes to intervening policy regarding rate hikes.

In recent months, that stance has been mirrored by Fed officials, and Clarida’s statements on Tuesday fall in line with that. A patient approach is supported by Clarida’s comments that the recent influx of workers re-entering the labor force shows that there is some “slack” in the labor market, and that the headline figure of 3.8% unemployment might not reflect full employment.

The rate of workers re-entering the workforce has taken the Fed by surprise, with Clarida pointing out that there may yet be more to come. Workers may be returning from a break or discouraging factors which are no longer present.

Vice Chair Clarida explains that this conference and others around the @federalreserve system are designed to review monetary policy while listening to members of communities around the country. Watch at https://t.co/h0hx4ipyZd. #FedListens https://t.co/Q1UTPggKAQ pic.twitter.com/haTX0PypIP

— Minneapolis Fed (@MinneapolisFed) April 9, 2019

Monetary Equality Rising

Clarida noted that recent job gains also have helped narrow the elevated gap in unemployment rates between whites and racial and ethnic minorities, and have helped lower income groups make up ground economically.

“Wage increases in the past couple of years have been strongest for less-educated workers and for those at the lower end of the wage distribution,” Clarida noted. A report made in last July indicated that monetary equality overall was shrinking.

Market Reaction

Spot gold is trading at $1,302.99/oz, up a modest 0.04% with a high of $1,305.27/oz and a low of $1,301.53/oz, buoyed up by the crucial psychological line of support at $1,300 earlier in the session. The statements made by Clarida had the potential to create selling pressure by supporting the Fed’s stance on weak inflation pressure and a rate hike pause, but gold has remained relatively flat.

June Gold Futures are down -0.3% and trading at $1,307.90/oz.