Latest / The Federal Reserve Podcast with Fexingo: Interest Rates, FOMC Meetings, and Monetary Policy / What the Fed Reads Into Long-Term Unemployment
Transcript
- Lucas: The May jobs report drops tomorrow morning, and the consensus is looking for about 180,000 new payrolls — solid, not spectacular. But there's a number buried in the household survey that I think matters more than the headline. Luna: Long-term unemployment, right? The CNBC piece yesterday flagged that the number of people out of work for 27 weeks or more is surging. Lucas: Exactly. And that's the angle I want to focus on today — what the Fed actually reads into that metric. Because on the surface, the labor market looks fine. ADP reported 122,000 private payrolls added in May, a bit above expectations. The unemployment rate is low. But the composition of who's unemployed is shifting in a way that historically keeps central bankers up at night. Luna: Is this the hysteresis argument? That once people are out of work for a long stretch, they become permanently detached from the labor force? Lucas: That's exactly the mechanism. Ben Bernanke wrote about this extensively during his time at Princeton — the idea that a deep recession can permanently destroy productive capacity if workers lose skills, networks, and confidence. The Fed's models actually embed a hysteresis parameter. When long-term unemployment rises above a certain threshold, the natural rate of unemployment increases, and that changes the inflation calculus. Luna: So the Fed might see a hot labor market headline but still worry about scarring underneath. Lucas: Right. And right now, the data is sending a mixed signal. The four-week moving average of initial jobless claims is still low, around 220,000. But the number of people receiving benefits beyond 26 weeks — that's the extended duration bucket — has climbed about 12 percent over the last three months. That's a leading indicator for the long-term unemployed count. Luna: And the Fed's own Beige Book has been flagging this for a couple of cycles now. I recall the April Beige Book mentioned that some districts reported employers are hesitant to hire people with gaps in their resumes. Lucas: That's the scarring in real time. Employers see a six-month gap and filter out the applicant. So the person stays unemployed longer, the gap widens, and the cycle feeds itself. The Fed can't fix that with rate cuts alone. But it does shape their reaction function — if they think the labor market is structurally weaker than the unemployment rate suggests, they may be more cautious about tightening further. Luna: Where does inflation fit into this? Because we just got the April CPI print — headline at 332.4, core at 335.4, both still creeping up. Lucas: That's the tension. The Fed's dual mandate is price stability and maximum employment. If long-term unemployment is rising, that argues for accommodation — or at least holding steady. But inflation is still above target. Core PCE, their preferred gauge, is at 129.6, up from 129.3 a month earlier. The ten-year breakeven rate is at 2.36 percent, which is above the Fed's 2 percent target but not alarmingly so. Luna: So the Fed is stuck between two signals. And the long-term unemployment data might be the tiebreaker for the next FOMC meeting. Lucas: I think it's one of several tiebreakers. The effective fed funds rate is at 3.63 percent, down just a basis point from last month. The market is pricing a hold through July. But if tomorrow's jobs report shows not just headline payrolls but a big jump in the long-term unemployed share, I think the hawks on the committee lose some argumentative power. Luna: You know, it's interesting — we talk about the Fed's data dependency all the time, but this is a case where the data they're actually dependent on isn't the one making headlines. It's the obscure sub-category. Lucas: That's why we do this show. And honestly, it's also why we keep this podcast ad-free and listener-supported — because drilling into this stuff takes time and independence. A small group of listeners already chips in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these episodes. Luna: Yeah. And it means we don't have to chase clicks or hot takes. We can spend ten minutes on long-term unemployment hysteresis because that's actually what matters. Lucas: Exactly. So if the economy makes a little more sense because of this show, and you want to keep it that way, that's the link. No pressure ever. Now, back to those scarring dynamics — because I want to get specific about the numbers. Luna: Please. What's the actual threshold where the Fed starts to worry? Lucas: Historically, when the share of unemployed who have been out of work for 27 weeks or more crosses 20 percent, it gets flagged in the Tealbook — that's the Fed staff's briefing document. Right now that share is around 21.5 percent, up from 18 percent a year ago. So we're past that threshold. Luna: And that's despite a low overall unemployment rate. That's the part that surprises people — they assume low unemployment means everyone's doing fine. Lucas: Right. The overall unemployment rate is 3.9 percent. But that masks a bifurcated labor market. If you're in a high-demand sector — healthcare, AI infrastructure, energy — you're probably seeing wage growth of 5 to 6 percent. If you're in retail, hospitality, or lower-skill white collar, you might be cycling through temp gigs and falling into the long-term bucket. Luna: Does the Fed have any direct tools to address that kind of structural mismatch? Lucas: Not directly. Monetary policy is a blunt instrument. But what the Fed can do is keep financial conditions from tightening further, so that businesses don't pull back on hiring. That's why Chair Powell has been emphasizing 'patient' and 'data-dependent' language. They don't want to add to the scarring by over-tightening. Luna: So the long-term unemployment data becomes part of the argument for holding rates steady, even if inflation is sticky. Lucas: Exactly. And the ten-year yield at 4.53 percent is already doing some tightening for them. Mortgage rates are above 7 percent. Corporate bond spreads have widened a bit. If the Fed held rates here for the rest of the year, financial conditions would still be moderately restrictive. They don't need to push further to cool the economy. Luna: Unless the inflation data accelerates. But core PCE is moving up very slowly — it's not flashing red. Lucas: It's amber. The ten-year breakeven at 2.36 is above target but well within the range of the last few years. And the Iran situation — energy prices — that's a supply shock. The Fed typically looks through supply-driven inflation spikes unless they feed into expectations. So far, long-term inflation expectations remain anchored around 2.3 to 2.5 percent. Luna: So the long-term unemployment story might be the most interesting variable in the next FOMC decision. It's not the headline. Lucas: It rarely is. And that's what makes following the Fed a research project, not a headline-reading exercise. Tomorrow's jobs report will have the usual payrolls number, but the household survey's duration of unemployment table is where I'll be looking. If that long-term share ticks up again, I think the July meeting is a lock for a hold. Luna: And if it drops? Lucas: Then the hawks have more ammunition to argue for a quarter-point hike to get inflation down faster. But given the trajectory over the last six months, I doubt we see a sharp reversal. Luna: One more thing — the tariff news from yesterday. The U.S. proposing fresh tariffs on 60 economies. Does that feed into the Fed's labor market calculus at all? Lucas: Indirectly, yes. Tariffs can increase input costs for manufacturers and retailers, which could lead to layoffs in trade-exposed sectors. That would exacerbate the long-term unemployment problem. But it's a slow burn effect — not something that shows up in one month's data. The Fed will monitor it, but it's probably a second-order concern right now. Luna: So the big takeaway for our listeners: don't just look at the unemployment rate. Look at how long people have been unemployed. Lucas: That's the episode in one sentence. The duration of unemployment is a window into the structural health of the labor market, and right now it's telling us that beneath the surface, there's more fragility than the top-line numbers suggest. The Fed sees it, and it's shaping their policy stance more than most people realize. Luna: And we'll be back tomorrow with a quick read on the jobs report, focusing on that duration metric. Lucas: Exactly. Thanks for listening.