(Bloomberg) -- The U.S. labor market is near or beyond full employment, while some pockets of finance are showing signs of rising leverage and high valuations, according to a Federal Reserve report.
“The labor market in early 2018 appears to be near or a little beyond full employment,” the Fed said in the February 2018 Monetary Policy Report published in Washington on Friday. “The unemployment rate is now somewhat below most estimates of its natural rate.”
The 55-page report, released days before Chairman Jerome Powell delivers his first semi-annual testimony before House and Senate committees, reprised recent economic data and the Fed’s policy actions. Powell will preside over his first meeting of the Federal Open Market Committee as chairman on March 20-21.
The report also included a number of sidebars on separate topics, including inflation, financial stability and monetary policy rules.
The report noted that the labor force participation rate, a measure of what percent of the working age population either has a job or is looking for one, has been mostly unchanged over the past four years, “representing an important cyclical improvement relative to its declining trend.”
“The current level” of the participation rate “is relatively close to many estimates of its trend,” the report said. While the participation rate for prime-age men remains below its pre- recession levels, that “seems to reflect the continuation of a decades-long secular decline rather than a cyclical shortfall.”
The Fed said that despite reports employers are having difficulty finding qualified workers, “hiring has continued apace,” and wage gains have been moderate. “Serious labor shortages would probably bring about larger increases” in wages “than have been observed thus far.”
Financial Vulnerabilities
Overall financial vulnerabilities “remain moderate on balance,” according to the report. “Valuation pressures continue to be elevated across a range of asset classes.”
There are signs that “nonbank financial leverage has been increasing in some areas,” the report said, such as credit to stock investors such as hedge funds.
Other hot spots included “increasing valuation pressures” in commercial real estate. Risks associated with maturity transformation “continue to be low,” the report said. The report noted that the asset-backed securities markets saw new types of asset pools, such as mobile phone leases and aircraft leases.
Financial-market volatility has surged since policy makers met in January, and financial conditions have tightened. Yields on 10-year government bonds are around four-year highs at 2.88 percent as of Friday morning, while the Standard and Poor’s 500 Index is up 1.9 percent for the year after slipping from last month’s record high.
The discussion on inflation noted that the rate of price changes was low across advanced economies. The report suggested that the rate of unemployment that exerts neither upward nor downward pressure on inflation could be lower than economists estimate. Inflation expectations could also be lower than indicators suggest, the report said.
(Adds comment on wages in seventh paragraph.)