Jobs or inflation — Is the Fed distracted?
The Federal Reserve doesn’t get much love from Washington these days but it did receive a rare bit of political backing on Wednesday as Democrats defended its role in promoting full employment as well as stable prices.
The U.S. central bank has been the target of criticism from members of both political parties as a result of bank bailouts and hands-off rule-enforcement that let predatory and unsound lending practices go unchecked, among other shortfalls.
But discussing legislation narrowing the Fed’s mandate to a single-minded focus on price stability, Democrats questioned the need to drop the full employment side of the dual mandate.
“Is it a problem?” asked Minnesotan Keith Ellison. “To the degree that we have problems with monetary policy, is the dual mandate the cause?”
Ellison said that far from distracting the Fed, the lofty 8.1 percent unemployment rate should get greater attention. “This is a national disgrace,” he said.
Ron Paul, a presidential candidate who chairs a subcommittee on domestic monetary policy, held a hearing to discuss several pieces of legislation changing the Fed’s mandate. Two of these would limit the Fed’s focus to price stability.
With partisan divisions and other priorities, Congress is unlikely to make any changes to the Fed’s mandate this year. But the effort could gain momentum if Republicans control both houses of Congress after November.
An upward bias in jobless claims revisions
Weekly data on applications for unemployment benefits have gained renewed importance since a weak March payrolls number left economists wondering whether a tentative labor market recovery was about to cave again. The last two weeks’ readings were just soft enough to leave investors thinking the country’s unemployment crisis may not be healing very quickly.
Daniel Silver at JP Morgan has dug deeper into the claims figures and found a curious trend: a repeated and distinctive tendency toward upward revisions in the numbers.
There has not been a downward revision to the initial claims data reported for the prior week since the start of March 2011, and this recent streak is not a new phenomenon—there have been upward revisions in about 90% of the weekly reports since the start of 2008, as well as going back even further to the start of 2000. These revisions are relatively minor (usually adding only a few thousand claims) and do not change the broader trends in the data, but they can lead to the weekly claims reports showing decreases to the more recent levels, whereas if the prior week had been unrevised, the reports would have shown increases in claims.
What is the reason behind this? Silver identifies two possible sources: backdated claims and interstate applications, which take an extra week before they make it into the report.
As for what happened in the latest week — claims were revised up by 8,000 to 388,000. That’s just teetering around the level that economists believe separates an improving labor market from a deteriorating one.
What have a trillion euros done for the economic outlook? Not much yet
The trillion euro sugar rush that made Q1 the best start to the year for global stocks in more than a decade has already worn off, but what is most striking is not how quickly it ended. It’s how little the economic outlook has changed.
Cheap central bank money mainly seems to have boosted stocks and the optimism of stock market forecasters, who generally are the most bullish of the lot with or without wads of cheap money.
An analysis of Reuters Polls over the past three months, starting just before the European Central Bank made the first of two gargantuan injections of cheap three-year money into the banking system, reveals what many have fretted might happen.
Derived from professional market forecasters and economists, they showed that the cash would probably do a lot to push up asset prices in the short term but do little to help a stalled euro zone economy with rising unemployment.
The consensus for Q1 euro zone GDP has stagnated at a quarterly contraction of 0.2 percent in the past three monthly Reuters polls, starting from the December poll, taken before the ECB’s first of two long-term refinancing operations (LTROs).
Over the same period, the outlook for 2012 growth as a whole deteriorated from none at all to a mild 0.3 percent contraction.
Frankfurt’s DAX had its best Q1 since 1998, up a staggering 18 percent. European shares more broadly rose 7 percent – still, the kind of return an investor might hope to get during a good year, not three months.
Cheap central bank money mainly seems to have boosted stocks and the optimism of stock market forecasters
houch!!
the problem is that this money must be repaid in three years
look to market capitalization of spain italy portugal ecc..
in europe there is a lot of people with losses of 30 50% on share prices in their portfolio “wealth effect” is a good boost for consumers investors ecc.
Hysterical about hysteresis
Economists at times fancy themselves scientists – and they like to borrow from scientific lingo to lend their theories some extra gravitas.
The U.S. unemployment crisis is a case in point. There is a long-running debate among economists as to whether the bulk of joblessness is cyclical, resulting from a lack of demand in a depressed phase of the business cycle, or structural, the product of more fundamental issues such as skills mismatches. The latter problem is more intractable, economists say, and less amenable to treatment via an easy monetary policy.
Nearly three years into the economic recovery, the jobless rate remains at a historically elevated 8.2 percent. Moreover, the economy has only made up about 3.6 million of the nearly 9 million lost during the recession. Against this backdrop, there is widespread concern that the U.S. economy might soon reach a point of what economists call (and here’s where the science comes in) “hysteresis.” In physics, the concept is defined as follows:
The retardation of an effect when the forces acting upon a body are changed (as if from viscosity or internal friction); especially : a lagging in the values of resulting magnetization in a magnetic material (as iron) due to a changing magnetizing force.
In economics, the term refers to the possibility that prolonged periods of cyclical joblessness, if left unchecked, could become structural as workers skills are eroded and their attachment to the labor force fades.
Fed Chairman Ben Bernanke highlighted that risk in a recent speech to business economists:
If progress in reducing unemployment is too slow, the long-term unemployed will see their skills and labor force attachment atrophy further, possibly converting a cyclical problem into a structural one.
Lower future jobless rate may give Fed little comfort
While Federal Reserve Chairman Ben Bernanke was noting the recent strengthening of the U.S. job market is “out of sync” with an otherwise slow recovery on Monday, economists at the New York Fed drew attention to the jobless rate itself by saying that some big changes lie ahead for U.S. labor.
The jobless rate may fall faster than expected to less than 5 percent in five years’ time, the economists said in the first in a series of posts but that seems likely to be due more to the fact that fewer people will be in the labor market than to future job creation.
The post notes how, between 2008 and 2012, the employment to-population ratio had a different pattern than in previous economic cycles, with the unemployment rate falling “because the participation rates declined substantially”. Given the U.S. aging population, with 10,000 baby boomers turning 65 each day, this rate is likely to decline even more. The argument has interesting implications, including a potential decline in the usefulness of the jobless rate as a gauge of well-being.
If the employment-to-population ratio continues to be sluggish as the unemployment rate declines (suggesting that flows to nonparticipation are important in driving the unemployment rate decline), then the unemployment rate will emerge as an increasingly less reliable measure of the health of the labor market.
If so, what will Fed officials look at when defining its future policies?
Channeling Milton Friedman
Ask not what your monetary policy can do for you, but what you can do for your monetary policy. That’s the jist of a 1968 paper by Milton Friedman, the poster-child for monetarist economics, entitled “The Role of Monetary Policy,” whose key questions remain hotly debated more than four decades on. Friedman’s answer is simple (some might argue too simple), and all too familiar to those who read the speeches of present-day Federal Reserve hawks – focus on the only thing monetary policy can truly control, which in Frideman’s view is price stability.
By setting itself a steady course and keeping to it, the monetary authority could make a major contribution to promoting economic stability. By making that course one of steady but moderate growth in the quantity of money, it would make a major contribution to avoidance of either inflation or deflation of prices. […] That is the most that we can ask from monetary policy at our present stage of knowledge.
Friedman’s writing suggests he was not a big fan of the Fed’s own dual-mandate, introduced in 1978. Any effort to goose employment through a persistent period of low very low interest rates, Friedman argues, would likely lead to overshooting and inflation.
The monetary authority should guide itself by magnitudes that it can control, not by ones that it cannot control.
Sound familiar? Here’s Charles Plosser, president of the Philadelphia Fed, last month:
The level of prices and thus inflation is a monetary phenomenon over the intermediate to longer term, and so the inflation rate can be chosen and controlled through monetary policy. The same cannot be said for the goal of maximum employment or the unemployment rate. These are largely determined by factors that are beyond the direct control of monetary policy.
Of course, it’s not just Fed hawks who channel the fiercely anti-government University of Chicago economist and Nobel Laureate. Charles Evans of the Chicago Fed cites Friedman’s seminal work with Anna Schwartz, “A Monetary History of the United States,” to argue that the U.S. central bank should actually be doing more to boost growth and employment. Friedman and Schwartz said the monetary authorities in the 1930s mistook rising bank reserves for expansive monetary policy, amplifying the Great Depression by keeping policy too tight.
While Fed intervention may seem contrary to Friedman’s free market ideals, in fact what he was recommending was for the Fed to imitate a free banking system in which the money supply expands and contracts in response to demand.
Despite Wall St cheers, jobs still in a rut
Looking at the commentary from bank economists on this morning’s “stronger-than-expected” employment report, you would think the country is on a clear path to recovery. Jack Ablin, chief investment officer at Harris Private Bank, was downright euphoric:
This is critical, this is the most important data that we have seen this cycle. This is going to get people’s attention. This confirms that most of the negativity we have seen in the market is derived from the market itself and not the data.
Never mind that nearly half of the 103,000 new jobs “created” in September were accounted for by the return of thousands of striking Verizon workers to their jobs. Brian Dolan, chief strategist at Forex.com, didn’t let that caveat tamp his enthusiasm:
It’s a breath of fresh air and should allow the risk recovery we’ve had this week to continue.
Now to put the gain, which left the jobless rate stuck above 9 percent for fifth straight month, in some perspective. Since the official start of the recovery more than two years ago, the economy has made up less than a quarter of the more than 8 million jobs lost during the recession. That leaves a jobs deficit of some 6 million jobs, and ignores the millions more Americans who have entered the labor force given normal population growth.
So before economists get too chipper, they might do well to take a look at this startling graphic from the Bureau of Labor Statistics of the employment-to-population ratio, brought to our attention on Twitter by former White House spokesman Tony Fratto.
Evans doctrine gains traction at Fed
Once seen as an extreme, even imprudent notion in the corridors of respectable central banking, the idea that a little bit of inflation is needed to let some of the air out of a decades-long debt bubble is gaining ground in establishment economics. Even the U.S. Federal Reserve, a central bank that prides itself in offering a high degree of steady predictability on inflation, is now actively pondering taking more drastic steps, such as linking the path of interest rates to the direction of unemployment or inflation.
One particularly striking passage in minutes to the Fed’s August meeting signaled such an approach was much closer to becoming policy than investors and economists had believed:
In choosing to phrase the outlook for policy in terms of a time horizon, members also considered conditioning the outlook for the level of the federal funds rate on explicit numerical values for the unemployment rate or the inflation rate. Some members argued that doing so would establish greater clarity regarding the Committee’s intentions and its likely reaction to future economic developments, while others raised questions about how an appropriate numerical value might be chosen. No such references were included in the statement for this meeting.
Reuters flagged the theme on Sept. 2 (Fed could get specific on goals if recession hits), just as Chicago Fed President Charles Evans began campaigning for such an approach, which depending on its form might be referred to as price-level targeting. Under such a regime, the Fed would allow inflation to surpass its 2 percent goal for a period, letting it rise to, say, 3 percent, in an effort to stimulate investment and economic activity. Evans argued before the European Economics and Financial Centre in London last week:
We need to take strong action now. Given how truly badly we are doing in meeting our employment mandate, I argue that the Fed should seriously consider actions that would add very significant amounts of policy accommodation. If 5 percent inflation would have our hair on fire, so should 9 percent unemployment. Such further policy accommodation does increase the risk that inflation could rise temporarily above our long-term goal of 2%. I do not think that a temporary period of inflation above 2% is something to regard with horror.
Is Evans alone? JP Morgan’s resident Fed watcher Michael Feroli thinks not:
Well, inflation is no big deal if you are as financially comfortable as these guys! It becomes a big deal for those millions of families out there that are just barely getting by now and for whom even a slight increase in the price of gas, groceries, clothes, and other necessities may well tip them over the edge.
Health and the older worker
An interesting post on ING’s new eZonomics blog points the reader to a new study on older workers and health. The findings — as reported in The Lancet — don’t at first glance look terribly surprising:
A poor work environment and health complaints before retirement were associated with a steeper yearly increase in the prevalence of suboptimum health while still in work, and a greater retirement-related improvement; however, people with a combination of high occupational grade, low demands, and high satisfaction at work showed no such retirement-related improvement.
In simple terms, this is saying that if a worker is happy, their health is better. Anyone who has ever had a bad job could have told them that! But the study, of course takes it further.
Working life for older workers needs to be redesigned to achieve higher labour-market participation.
This has broad implications, given the trend away from final salary pensions and the general view that workers are going to have to work longer than in previous generations. Companies that are faced with workers who cannot easily retire because of a lack of pension savings, that need people to work longer and that are subject to increasing anti-age discrimination will need to take the employment needs of older employees on board.
It may not be easy. As the ING post points out, the OECD looks at the issue in a 2006 report entitled “Live Longer, Work Longer”. It began its report:
In an era of rapid population ageing, many employment and social policies, practices and attitudes that discourage work at an older age have passed their sell-by date and need to be overhauled. They not only deny older workers choice about when and how to retire but are costly for business, the economy and society.
Consider the fact that corporations are considered citizens under US law. They have deep pockets and legislators listen to people with deep pockets.Our educational systems are tied to corporate interests which is why arts and humanities have been all but stripped from educational circles while the sciences and mathematics take top priority.Retirement costs money. If a worker can keep on working into old age then the likelihood of paying out very much before the retiree dies is much less.Want to keep workers happy? It can be done by making sure they have a safety net. In the Netherlands a person who looses their job can remain on unemployment as long as they are going to school or looking for work. They don’t have to worry about loosing their homes or going without food or health care.With that kind of stress off of the shoulders of American workers it would be easy for them to stay happy and healthy, and thus much more productive. Because they would be at work by choice. And not because they need the money.This article looks at ways to maximize the millage an employer can get out of a worker while investing as little as possible in them. If our courts would do the right thing and remove citizen status from corporate America, then the most important constituents to the legislature would once again be the American citizen and not some amorphous facsimile of a “person” with no individual identity.This article shows how it’s in the interests of business to do better by the employee. But it doesn’t address these problems from the point of the citizen. In other words it doesn’t focus on making sure that citizens have more freedom to choose their occupations by making education more easily accessible. And by providing a financial safety net that does not force them into jobs where they would be the least productive.Even the mightiest trees still get their water from the roots. The citizen is the root of the economy. Our workers are best served when our government prioritizes investment in the individual citizen over investment in corporations.We need a REAL social safety net. But all we get is lip service and taxes, which go to keeping “the economy” alive at the expense of the citizens that support it.
The Feds don’t control credit unions, that’s why I moved my money. That and the fact that they actually pay you interest on your savings!