Having erred in calling the inflation surge transitory, the Fed appears to be making another error in assessing the labor market. The official statement following the December 14-15 FOMC meeting stated that "the Committee expects it will be appropriate to maintain this target range (i.e., on official rates) until labor market conditions have reached levels consistent with the Committee assessments of maximum employment.
What is maximum employment? Maximum employment is a level of employment and joblessness that strikes a healthy balance between demand and supply of labor, resulting in moderate wage increases. The current employment situation is anything but balanced.
November's unemployment rate of 4.2% is 1.8 percentage points below March. The last time the jobless rate starting at 6% fell as much as it did since March was 1950---over 70 years ago. Yet, after that record fall, there are 11 million job openings, 4 million more than the unemployed. Moreover, a record number of small businesses can't find qualified workers, and a record number are planning wage increases.
Average hourly earnings have increased 5.9% in the past year. Workers are demanding more, and companies are rushing to meet those demands by hiking wages and bonuses and promising more.
Labor markets have far passed the point of demand and supply balance. And by not recognizing the tightness of labor markets, the Fed is fueling a faster wage cycle and a different source of inflation.