In the short-term, the weakness in the labor market reflects a shortfall of aggregate demand relative to the economy’s potential, which is an important part of the rationale for the currently accommodative stance of monetary policy. The real federal funds rate is now close to zero, and market participants expect it to remain near that level for a while.
Obviously, we monetary policy makers will have to determine the degree to which the improvements in the labor market signaled in the most recent report indicate that the economy is meaningfully closing the gap between aggregate demand and the economy’s productive capability, and the pace with which that gap is being narrowed.