What Dropping Unemployment Doesn’t Tell Us 

At next week’s FOMC meeting, the state of the labor market will play a key role in policy deliberations. But there’s a lot more going on underneath top line unemployment numbers that make them a bad tool for monetary policy decision-making.

The May employment report is a conundrum. Employment growth and the unemployment rate sent opposing signals about labor market conditions – much like they have been doing throughout the recovery. The economy added 138,000 jobs last month, with the three-month average only at 121,000 jobs, suggesting labor market weakness.

By contrast, the unemployment rate fell to 4.3 percent – the lowest reading in 16 years. Additionally, job openings are near an all-time high. And voluntary quit rates are up. These data all suggest tight labor market conditions.

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