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How Falling Labor Force Participation Reshapes Fed Policy
Description
In Episode 93 of The Federal Reserve Podcast with Fexingo, Lucas and Luna examine the Fed's growing concern over falling labor force participation, which hit a 50-year low in June 2026. They discuss why the drop is structural rather than cyclical, how it complicates the Phillips curve, and what it means for the terminal rate. Drawing on the latest jobs report showing only 57,000 payrolls added, they explore whether the Fed's reaction function is shifting away from a pure inflation target toward a dual mandate that gives more weight to labor supply. The episode also covers the puzzling divergence between the headline unemployment rate (4.2%) and the participation rate, and what that signals about the economy's underlying capacity constraints.