MacroScope

When calibrating monetary policy, central bank officials often turn to the Taylor rule, a useful construct for thinking about the relationship between unemployment and inflation pioneered by John Taylor, former Treasury official and Stanford economics professor. So as the U.S. economy appears to falter and investors begin to speculate on the prospect of another round of monetary stimulus from the Federal Reserve, it’s worth checking in with Taylor’s model.

Economists at Goldman Sachs sought to do just that in a recent research note, and they found something interesting: if one accounts for the effects of unconventional easing through bond purchases as estimated by Fed Chairman Ben Bernanke, then policy is currently as accommodative as it needs to be.

To call for additional easing, these Taylor rules would need 1. much smaller estimates of the effectiveness of asset purchases than cited by Bernanke and/or 2. significant further deterioration in the Fed’s economic outlook.

Taylor himself has been critical of the Fed’s unconventional bond purchases, saying they are not very effective and may be riskier than they are worth.

However, Joseph Gagnon, a former Fed staffer now at the Peterson Institute for International Economics, argues that economists need to move away from abstract constructs and focus on reality, particularly during times of economic turmoil. Given a 9.2 percent jobless rate and low inflation, the Fed should be on doing more to support growth, said Gagnon in a telephone interview.

Over breakfast with a small group of reporters this week, Chicago Federal Reserve Bank President Charles Evans made clear he’d be supporting easier monetary policy today, if only the Fed could still cut short-term interest rates.

It can’t, of course. Rates have been near zero for more than two and half years, and the Fed has turned to other tools, including massive bond purchases, to support the economy further.

With unemployment still high and inflation too low, Evans said, the U.S. economy could do with more monetary policy stimulus, but the tools the Fed has left are no longer its best.

The Federal Reserve is hinting that if it should come to further monetary easing to stimulate growth, it might prefer to talk the talk rather than walk the walk.

Fed Chairman Ben Bernanke said last week the central bank is “ready to respond” if the recovery stalls. While such a move isn’t imminent, he made clear that even with interest rates near zero, the Fed has plenty of options to spur growth if it needs to. When Bernanke in August 2010 spelled out alternative policy measures before launching the Fed’s second round of quantitative easing — $600 billion worth of Treasuries purchases — he listed bond buying first.

But in testimony to Congress last week, communications steps topped the list:

One option would be to provide more explicit guidance about the period over which the federal funds rate and the balance sheet would remain at their current levels.

In the last comparable recession, which we know wasn’t anywhere near as deep as the Great Recession just endured, U.S. jobless claims peaked at 695,000 in October 1982.

Weekly initial unemployment claims is an extremely reliable leading economic indicator because the figure is not derived from a survey. It’s an actual tally of real people without a job who are queuing up for the dole.

By the end of the following year, about 14 months later, weekly initial unemployment insurance claims had plunged by more than 300,000 to 372,000. They dipped even further to 333,000 in January 1984.

The latest Reuters quarterly economic outlook, based on surveys of more than 600 economists across Asia, Europe and North America smells a bit of danger.

Growth is looking very uneven. Inflation is a worry here but not there. Unemployment looks to remain perilously high.

It also has a whiff of the surveys Reuters conducted a few years ago just before the Great Recession set in, when economists were saying we’d all muddle through with a bit of a slowdown and don’t worry about a thing. How wrong they got that one.

In the realm of  long-term economic things to worry about, there is not much that can rival youth unemployment in the greater Middle East and North Africa. Some years ago, for example, the World Bank  estimated that the region’s population rise was such that jobs needed to grow by some 3.5 percent  per year if unemployment along the lines of one-in-four was to be avoided over the next couple of decades. There has been nothing of great note to change this forecast.

The International Monetary Fund has just weighed into the issue with a post on the subject and some startling figures on the depth of the problem. As author Masood Ahmed writes:

Simply put, the region is facing unparalleled demographic pressures. Population growth over the past two generations has been among the fastest in the world: the region’s work force is projected to reach 185 million in 2020, 80 percent higher than in 2000. And the region is one of the most youthful in the world—with about 60 percent of the population less than 25 years old.

The longest recession since the Great Depression has taken an exacting toll on Americans and their ability to put food on the table. Families who once considered themselves solidly middle class are now signing up for food stamps or turning to food banks to feed themselves in the face of lost jobs or cut wages.

"These are our neighbors, our friends, the people we go to church with," said Margaret McKenna, president of the Walmart Foundation, of the number of Americans who are going hungry. "This is not like this is the other, people we don't know. These are people we do know."

Food stamp enrollment has reached record numbers, while a  survey by Feeding America, the nation's largest domestic hunger relief organization, found that 99 percent of participating food banks reported a surge in demand for emergency food assistance in the past year. Ninety-eight percent of food banks said that demand is being driven by first time users.

If you’re looking for ground zero in America’s longest and deepest recession, El Centro in southern California appears on first glance to fit the bill.

The unemployment rate here and for the whole of Imperial County hit 30.1 percent in September, the highest rate in the United States. Locals say there is no denying that El Centro has suffered as a result of the recession and that jobs are more scarce in an area where agriculture is the backbone of the community and forms 25 percent of the local economy.

“We’ve always had high unemployment, but nothing like this,” said Judith Klein-Pritchard, director of the Center for Family Solutions of Imperial Valley, which provides intervention for domestic violence and shelter services in the area.

Talk about a disconnect.

Experts say U.S. economic growth has returned, signaling the end of the longest and deepest recession since the Great Depression.

But the good news for Wall Street -- where shares have been running up -- is showing no signs of trickling down to Main Street, where unemployment is flirting with 10 percent, foreclosures continue to rise and record numbers of families now depend on government-issued food stamps to make ends meet.

"For every person out of work, for every family facing foreclosure, for every small business facing a credit crunch, the recession remains alive and acute," U.S. Treasury Secretary Timothy Geithner said in testimony to a congressional committee.

Ever wonder how the U.S. Treasury Secretary gets through some of the most economically stressful times this country has seen in a while -- does he go for long runs? Sleep two hours a night?

Timothy Geithner has been in the job less than a year, and came in after the economy had slumped into recession. Now unemployment is approaching 10 percent, he's had to navigate through an economic stimulus package, and on top of all that the weakness of the U.S. dollar has other countries questioning whether it should still be the reserve currency.

Enough problems, we imagine, to give anyone a big giant headache and more than a few sleepless nights.