Fed’s Powell Says Real Jobless Rate Is 10%—With Big Policy Implications

Federal Reserve Chairman Jerome Powell has offered a sobering assessment of the U.S. economic prospects as the Covid pandemic rages: the actual unemployment rate when accounting for crisis-related exits from the labor force is closer to 10%.

That’s a huge contrast to the official 6.3% jobless rate reported for January and reinforces the central bank’s intention to keep interest rates at zero for as far as they eye can see—depite rising concerns about financial market stability risks from frothy markets.

“Published unemployment rates during Covid have dramatically understated the deterioration in the labor market,” Powell told a webinar sponsored by the Economic Club of New York.

Powell said the pandemic and its shock to the economy had triggered the largest 12-month drop in labor force participation since just after WWII.

“Fear of the virus and the disappearance of employment opportunities in the sectors most affected by it, such as restaurants, hotels, and entertainment venues, have led many to withdraw from the workforce,” Powell said.

“At the same time, virtual schooling has forced many parents to leave the work force to provide all-day care for their children. All told, nearly 5 million people say the pandemic prevented them from looking for work in January.”

He also cited a reported misclassification from the Labor Department that may have affected recent figures.

“Correcting this misclassification and counting those who have left the labor force since last February as unemployed would boost the unemployment rate to close to 10% in January,” Powell said, presenting this startling chart to drive his point home.

If the Powell sticks to this definition of employment conditions, it could even be quite a long time before the Fed’s criteria “substantial further progress” for reducing the pace of its monthly $120 billion bond buys is adequatedly met.