The Fed faces worker shortages, affecting its ability to fulfill its mandate. While inflation is rising, now at 3.8% on an annualised basis, the Fed is behind on securing jobs for the American people.

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The recent labour market reports in the United States took the market participants by surprise. Both April and May delivered fewer jobs than expected, but not because of the economy’s inability to create jobs, but because businesses are having a hard time filling vacancies.

In other words, it appears as if the workers “disappeared.” It is a side effect of the Fed’s monetary policies, coupled with the US government’s fiscal aid.

The situation is similar in other parts of the world, such as the United Kingdom or Germany. A shortage of workers led to employers offering higher wages and even incentives for people to turn up for an interview.

But the situation is especially important in the United States, where the Fed has a dual mandate. While other central banks may move the interest rate levels on the back of changes in inflation only, the Fed must consider the labour market too.

What Led to the Labor Market Crisis

One of the most plausible explanations is that the United States’ fiscal stimulus dwarfed comparable programs in the rest of the world. Firstly, it was Trump’s stimulus, then Biden’s, and the unemployment benefits continued uninterrupted, in many cases exceeding what income workers got when employed.

Secondly, the fear of COVID-19 persists. Many people are avoiding work due to the fear of being infected.

The effective vaccination campaigns may lead to herd immunity levels by the autumn, but in the meantime, the Fed must take some delicate decisions.

It chose to remain on hold at the previous meeting, but it may signal its intention to start the tapering of its asset purchases as soon as next week. That will be warranted if one considers only the part of its mandate that deals with inflation.

But the Fed may buy some time if it chooses to focus on the lack of progress seen in the labour market. After all, it did it in the past, when it used a certain unemployment rate as a threshold, so it may do it in the future too.