The decline in the overall labor-force participation rate chiefly reflects a decline in the male labor-force participation rate, and a flattening in the rate for women. Observers have offered conflicting reasons for the worrisome decline in men working.

Focusing on the prime-aged workforce, 25-54 years, eliminates most of the demographic explanations. By this measure, nearly 7 million workers, mostly men, have dropped out of the work force in the last 50 years. They are removed from both the workforce measure and the measure of the unemployed. The measured unemployment rate falls, but in a misleading way. Now the low unemployment rate is not a sign of strength in the labor force, but of men no longer seeking employment.

There are policy reasons for this (e.g., Social Security Disability Insurance) and social forces, including a decline in the work ethic among white, blue collar men. The latter has been examined by Charles Murray in Coming Apart: The State of White America, 1960-2010 and, more popularly, by J. D. Vance in Hillbilly Elegy. The bottom line is that, given economic entitlements and underlying social forces, we may be at the fullest employment possible.

Accordingly, there is a labor-market rationale for further rate hikes. The unemployment rate has become a misleading signal, however, and is neither a reliable target nor indicator of the stance of monetary policy. Further, the reasons for slow-output growth must be rethought. Slow growth in GDP reflects, at least in part, supply constraints in labor markets. There is nothing the central bank can do about that.

In my view, downsizing the Fed’s balance sheet is where the important policy actions will now take place. While an unwinding could potentially lead to instability in financial markets, the action is long over-due. The Fed’s outsized balance sheet, with a large amount of mortgage-backed securities, has put it in the credit-allocation business. It needs to get out of that business.

For the rest of 2017 we are looking at likely no further rate hikes and shift in the focus of monetary policy to the size of the Fed’s balance sheet. The FOMC is signaling that the unwinding will proceed at a moderate pace. Monetary policy is once again entering unchartered waters.

Commentary by Gerald P. O’Driscoll, Jr., a senior fellow at the Cato Institute. Formerly, he was vice president at Citigroup, and, before that, vice president at the Federal Reserve Bank of Dallas.

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