Latest / The Federal Reserve Podcast with Fexingo: Interest Rates, FOMC Meetings, and Monetary Policy / How the Fed Reads the Rising Participation Rate
Transcript
- Lucas: The labor force participation rate ticked up in June for the first time in three months. It's only up one-tenth of a percent, to 62.6 percent. But after the narrative has been all about people dropping out, this is a real shift in the data. Luna: And I think a lot of people hear that and assume it's good news for the Fed. More workers, less wage pressure, easier path to cut rates, right? Lucas: Right, and that's the surface-level read. But when you dig into the composition, it's actually more complicated. The entire increase came from prime-age workers — those 25 to 54 — where participation hit 83.7 percent, a new cycle high. That's genuinely healthy. But participation for workers 55 and older dropped another tenth, to 38.2 percent. Luna: So the people coming back are the ones who have the most leverage in wage negotiations. Prime-age workers can demand more because they have skills and experience. Older workers who are leaving? They're often retiring or giving up after long searches. Lucas: Exactly. And that's the wrinkle the Fed has to weigh. The overall participation rate is still well below where it was pre-pandemic — 63.3 percent in February 2020. So the labor market is still tight by historical standards. The fed funds rate is at 3.63 percent, and core PCE inflation is running at 130.1, up from 129.67. That's not cooling fast. Luna: So if prime-age participation is rising and those workers are getting higher wages, does that actually keep inflation stickier? Because more income flowing to people who will spend it? Lucas: That's exactly the concern. The Fed watches the employment cost index and average hourly earnings. If the mix of workers shifts toward higher-paid prime-age folks, the aggregate wage bill goes up even if individual wage growth is moderating. That can keep services inflation elevated. Luna: And we saw that in the May PCE report — core services excluding housing was still running at 3.5 percent annualized. That's way above the Fed's target. Lucas: Right. So the participation uptick isn't an automatic green light for rate cuts. In fact, some Fed watchers are now saying it could delay the first cut if it continues. The market is pricing in a cut in September, but that's far from certain. Luna: And speaking of global factors, China's producer price index rose to a near four-year high in June. That's going to feed into import prices for the U.S. eventually. So the Fed has to watch that too. Lucas: That's a great point. China's PPI is up partly because of energy and commodity costs, but also because of some policy stimulus. If U.S. companies start passing through higher input costs, that's another headwind for the inflation fight. Luna: You know, it's funny — we spend so much time talking about participation dropping, and now that it ticks up, it's not a simple 'problem solved' moment. Lucas: It never is with the Fed. Every data point has to be read in context. The participation rate is a lagging indicator anyway. It reflects decisions people made weeks or months ago. The real question is whether this is a one-month blip or the start of a trend. Luna: And if it is a trend, what would it take for the Fed to change its stance? They've been data-dependent, but the data keeps sending mixed signals. Lucas: I think they need to see a few months of consistent improvement in participation alongside a sustained decline in core PCE. We're not there yet. The 10-year breakeven inflation rate is at 2.25 percent — that's still above the 2 percent target. So the bond market isn't convinced inflation is vanquished either. Luna: And the yield curve is still inverted, though less than it was. The 2-year is at 4.31, the 10-year at 4.57. That's only 26 basis points of inversion. A year ago it was over 100 basis points. Lucas: Right, the curve is normalizing, but that usually happens when a recession is approaching or when the market expects rate cuts. Neither is a great sign. The Fed is walking a tightrope. Luna: Before we go deeper into the curve, I want to touch on something that ties back to what you said about reading data in context. If walking through the economy with us has made something click, or if you just appreciate an ad-free show that digs into these nuances, listener support is what keeps this going. You can find us at buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small way to help us keep doing deep dives without sponsors. And we genuinely appreciate it. Luna: Alright, back to the curve. So the inversion is narrowing. What does that tell us about the Fed's next move? Lucas: Well, the narrowing inversion means the market is pricing in rate cuts sooner rather than later. But the Fed has been pushing back against that. Chair Powell has said they need more confidence that inflation is moving sustainably toward 2 percent. The participation uptick, if sustained, could actually give them cover to hold steady because it shows the labor market isn't collapsing. Luna: So the paradox: good labor market news could mean bad news for rate-cut hopefuls. Lucas: Exactly. And then you add in the global dimension — China's PPI, European political uncertainty, Lagarde leaving the door open to an early ECB exit. The Fed has to consider all of it. Luna: It's a lot of variables. But that's why we do this show — to try to make sense of them. Lucas: And we'll keep watching the data. Next month's jobs report and the July CPI print will be crucial. For now, the participation rate is a flicker of light, but not a clear signal. Luna: And that's the reality of monetary policy in 2026. No easy answers. Lucas: No easy answers, but plenty to discuss. We'll be back soon.