Yellen's dilemma: what does the latest jobs report mean?

New York

THE biggest decision Janet Yellen has faced in her year-old US Federal Reserve chairmanship was laid bare in a single report on the domestic job market released last Friday.

The unemployment rate fell to 5.5 per cent as job creation continued at a strong pace. Joblessness is now within the 5.2-5.5 per cent range that Fed leaders say reflects a sustainable level over the long run.

For a Fed that has spent the past seven years doing everything it can think of to try to get the job market on track, that translates to Mission Accomplished. And by traditional central bank thinking, that would mean it has waited long enough to raise interest rates to prevent the economy from overheating.

But by other measures in the same report, overheating is a distant worry. Average hourly earnings rose only 0.1 per cent, and have now risen less than 2 per cent over the past year - pretty much what they have been doing for five years straight. The number of people in the labour force actually declined, suggesting that the pool of potential workers who neither have a job nor are looking for one is growing, not shrink…