Bernanke's Dual Mandate Trap

EconMatters's picture

By EconMatters, Aug. 18, 2012

After reporting an uptick of national unemployment rate of 8.3%, it is of little surprise that the Labor Dept. said on Friday that jobless rates rose in 44 U.S. states in July, with many states showing a monthly increase in more than three years. 


Chart Source: Calculated Risk, August 17, 2012


Unemployment Rate To Remain Sticky  

On the surface, the U.S. national unemployment rate has seemingly dropped almost a full percentage point from the high of 2011.  Nevertheless, the record rate of people dropping out of labor force, and long term unemployment has become a bigger problem than ever before, suggest the real labor market is worse than the headline unemployment rate entails.  Remember, people in the "Not in Labor Force" bracket (e.g., going back to school, discourage job finders quit looking, etc.) are not counted as "unemployed."


Monthly job gains have averaged 150,000 this year, close to the 150,000 to 200,000 a month of new jobs Fed Chairman Bernanke said needed to reduce the unemployment.  But eventually, a significant number of people will come back in the labor force to find jobs again, coupled with the increasing  difficulty for the long-term unemployed to land a job, expect the jobless rate to remain sticky for the next few years.


Fed's Dual Mandate Performance


Federal Reserve has a dual mandate to pursue price stability and maximum employment.  Right now, while the annual trend in prices is trending closely to the Fed's 2% target, the headline unemployment rate is still well above the pre-recession level of around 5%.  The chart below from the CFR (Council on Foreign Relations) plots actual inflation and unemployment performance relative to the two targets (CFR uses 5.6% as Fed's target for unemployment) since 2002.


As the chart shows, the sum of the deviations has declined since the peak in July 2009, but it is still well above zero (zero being a benchmark for fulfilling the dual mandate), which suggests that the Fed will continue to be accommodative.  In fact, given the debt crisis and recession in the Euro Zone, and the significant slow-down in China, traders' expectation of a 3rd round of Quantitative Easing (QE3) from the Fed is probably the only thing that's holding up the equity as well as the commodity markets.


Monetary Policy & The Labor Market 


Our observation is that the Fed seems to have a tendency to draw a straight line between the increase in stock market performance to the GDP growth and an improved employment.  That assumption might be valid pre 2008 financial crisis.  However, the deep scar from the Great Recession has left corporations running scared to "streamline" operations at an unprecedented pace that the increase in corporate profit and stock price does not necessarily translate into more investment and more hiring into the real economy any more.


Fundamentally, monetary policy by central banks has little direct impact on the labor market, which is part of the reason why almost all central banks in the world has only one explicit primary directive - price/inflation stability (although unemployment may be part of the implicit macroeconomic factors in the decision-making process.)   


More importantly, QE by the central banks is meant to loosen credit lending, which in turn should stimulate the economy.  But as Fed's two previous QE's have demonstrated, due to the structure of current global banking and financial system, QE has only mostly benefited banks to hoard cheap capital from the government to speculate in commodities and stocks to get better returns, rather than circulating and lending to business and consumers like banks are supposed to.


Futile Unemployment-QE Cycle 


Signs of inflation are manifesting in the "non-core" items (i.e. Food and Energy) not on Fed's "watch list."  With the employment situation unlikely to improve significantly in the medium term, Fed could fall into the trap of 'unemployment-QE' cycle feeling compelled to "do more" at the expense of inflation (it is essentially a bet on how much QE before rampant inflation), thus the greater good of the nation's economy.


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watch2x's picture

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slewie the pi-rat's picture

Federal Reserve has a dual mandate to pursue price stability and maximum employment.

L0L!!!  ghostedbybruceKrastings?

buzzsaw99's picture

dual mandate, that's laughable. the fed maggots care only about jew york shitty bankster bonuses.

Rainman's picture

You ask how Bernank is doing with his jobs mandate...? ..... the Mexicans are returning to Mexico to find a job.

Juan Wild's picture

Soon Americans will be crossing the border to get all those shitty jobs in Mexico.

Revert_Back_to_1792_Act's picture

Published in 1936 - from The Book by 'Coin Harvey'

A Mr. Tenike regarding the Federal Reserve bank in New York.

"The member banks deposit their money in the Federal reserve bank and draw out and deposit money each day.  Twenty five tons of silver coins goes in and out of the bank daily.  In the vaults there are vast sums.  In the gold vaults the gold bars are stacked on shelves like books in a library.  There is one gold vault there which alone contains 50 million dollars worth of gold bars... The bank has 2,700 employees.  Some departments of the bank operate 24 hours a day.  It takes 250 girls working steadily to count the incoming money."  Twenty five tons of silver coins is about one million dollars--and if distributed among the people would be about $1.00 for each of one million people.  If this money was among the people in the United States there would be no expense for counting the money daily; the people would take care of that and be spending it, daily, for their wants. (The Author)


I have a letter, other than the one before quoted, from the Federal Reserve Board as to who owns the Federal reserve banks and I quote from it as follows:  "All of the stock of the Federal reserve banks is own by banking institutions which are members of the Federal Reserve System, no stock  being owned by the Government of the United States"


the reader's special attention is called first to the law, that from the profits of money lending by these banks there shall first be paid the EXPENSES, and then six percent cumulative interest on all the stock in the Federal reserve bank, six percent additional to a surplus fund till it amounts to one hundred per cent, and thereafter ten per cent of the net earnings shall be paid into the surplus fund.  If there is any profit left it is to be paid to the government as a franchise tax.





Garth's picture

These are not the mandates you are looking for...

The Fed was created by Congress and the Fed's mandate is to fund the spending congress makes.

All else is just talk (or cover)...



disabledvet's picture

Only a quibble I have with this article: "where else is the investment going to come from" if not from the private sector? The Government's ONLY investment now and going forward is in debt. And of course..."debt is really hard to create" cuz...cuz...cuz...and shit. "Now let's blame LIBOR" cuz...cuz...cuz...and shit.

Juan Wild's picture

We are dealing with a lying, cheating,crime organization here. One which has absolute control of our monetary system (thank you Congress).The only mandate the Fed has is to enrich its stockholders. How? By perpetrating the most hideous PONZI SCHEME. Now if you are a just a former football coach with a ponzi, you go to jail. Hey sometimes a big wall street cockroach like Bernie gets busted for a ponzi too. But hey, not ever our own Fed, The King of The Ponzi Scheme. Protected by our own corrupt, look the other way,judicial system and slimey sanhedron-worshiping lawyers and greasy palmed politicians ((its not only jews, but a helluva alot of good ole american WASPs as well.))which our zombiefied (thank you main stream media, press-titutes and lying talking heads for all your years, upon endless tedious years of diversionary, self-serving editing of news, and the absolute total vacuum of even the faintest glimmer of the LOST ART OF INVESTIGATIVE JOURNALISM.)nation of idiots (me too, in the past)keep re-electing.
THE ONLY MANDATE THE FEDERAL RESERVE HAS IS TO DEVALUE THE DOLLAR! to hell with unemployment! Then more people will need benefits....making our government in need of more money to service them....hey,we need more money, raise the debt ceiling....okay fine....print more money...devalue dollar more...oh oh we need to attack another nation because___________<----insert BULLSHIT here. hey, it costs a lot of mullah to keep our troops in those air-conditioned tents in the desert and all those plastic bottles of evian. oops runnin out of money....hey fed, warm up those presses again, dont worry, our slimey politicians will raise the debt ceiling again. more debt...more printing more ..... this is AMERICA's VAULTED MONETARY SYSTEM. A PONZI SCHEME. END game. Mr. R at the top owns your ass ....oh sorry...that happened long ago. (thanks once more....THE FEDERAL RESERVE ACT of 1913...brought to you by our own treasonous elected representatives.)

"The few who understand the system, will either be so interested from it's profits or so dependent on it's favors, that there will be no opposition from that class." — Rothschild Brothers of London, 1863

"Give me control of a nation's money and I care not who makes it's laws" — Mayer Amschel Bauer Rothschild

"Most Americans have no real understanding of the operation of the international money lenders. The accounts of the Federal Reserve System have never been audited. It operates outside the control of Congress and manipulates the credit of the United States" — Sen. Barry Goldwater (Rep. AR)

"This [Federal Reserve Act] establishes the most gigantic trust on earth. When the President [Wilson} signs this bill, the invisible government of the monetary power will be legalized....the worst legislative crime of the ages is perpetrated by this banking and currency bill." — Charles A. Lindbergh, Sr. , 1913

"From now on, depressions will be scientifically created." — Congressman Charles A.
Lindbergh Sr. , 1913

"The financial system has been turned over to the Federal Reserve Board. That Board as ministers the finance system by authority of a purely profiteering group. The system is Private, conducted for the sole purpose of obtaining the greatest possible profits from the use of other people's money" -- Charles A. Lindbergh Sr., 1923

"The Federal Reserve bank buys government bonds without one penny..." — Congressman
Wright Patman, Congressional Record, Sept 30, 1941

"We have, in this country, one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board. This evil institution has impoverished the people of the United States and has practically bankrupted our government. It has done this through the corrupt practices of the moneyed vultures who control it". — Congressman Louis T. McFadden in 1932 (Rep. Pa)

"The Federal Reserve banks are one of the most corrupt institutions the world has ever seen.
There is not a man within the sound of my voice who does not know that this nation is run by the
International bankers — Congressman Louis T. McFadden (Rep. Pa)

"Some people think the Federal Reserve Banks are the United States government's institutions.
They are not government institutions. They are private credit monopolies which prey upon the people of the United States for the benefit of themselves and their foreign swindlers" — Congressional Record 12595-12603 — Louis T. McFadden, Chairman of the Committee on Banking and Currency (12 years) June 10, 1932

"I have never seen more Senators express discontent with their jobs....I think the major cause is that, deep down in our hearts, we have been accomplices in doing something terrible and unforgivable to our wonderful country. Deep down in our heart, we know that we have given our children a legacy of bankruptcy. We have defrauded our country to get ourselves elected." — John Danforth (R-Mo)

"These 12 corporations together cover the whole country and monopolize and use for private
gain every dollar of the public currency..." — Mr. Crozier of Cincinnati, before Senate Banking and Currency Committee - 1913

"The [Federal Reserve Act] as it stands seems to me to open the way to a vast inflation of the
currency... I do not like to think that any law can be passed that will make it possible to submerge the gold standard in a flood of irredeemable paper currency." — Henry Cabot Lodge Sr., 1913

hey even the fed sticks it in your face:

"When you or I write a check there must be sufficient funds in out account to cover the check,
but when the Federal Reserve writes a check there is no bank deposit on which that check is drawn. When the Federal Reserve writes a check, it is creating money." — Putting it simply, Boston Federal Reserve Bank

"Neither paper currency nor deposits have value as commodities, intrinsically, a 'dollar' bill is just
a piece of paper. Deposits are merely book entries." — Modern Money Mechanics Workbook,
Federal Reserve Bank of Chicago, 1975

"The Federal Reserve system pays the U.S. Treasury 020.60 per thousand notes --a little over
2 cents each-- without regard to the face value of the note. Federal Reserve Notes, incidentally, are the only type of currency now produced for circulation. They are printed exclusively by the
Treasury's Bureau of Engraving and Printing, and the $20.60 per thousand price reflects the Bureau's full cost of production. Federal Reserve Notes are printed in 01, 02, 05, 10, 20, 50, and 100 dollar denominations only; notes of 500, 1000, 5000, and 10,000 denominations were last printed in 1945." —Donald J. Winn, Assistant to the Board of Governors of the Federal Reserve system

"We are completely dependent on the commercial banks. Someone has to borrow every dollar
we have in circulation, cash or credit. If the banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system.... It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon." — Robert H. Hamphill, Atlanta Federal Reserve Bank

disabledvet's picture

It appears we have a Wild Juan here... Ah the days when having a Nakamichi Dragon meant you were "mr. cool." No? None of you remember those days? None of you even know what a Nakamichi Dragon is? How about some Gaucho then...

Juan Wild's picture

oh the Dan. where'd music like that go? the music biz is in the shithole as well. We can all thank Clear Channel Communications, stINC. for that. 1200 radio stations, each one no different than the other.
Thank you DV, I enjoyed the links.

beastie's picture

The author should fuck off or die. Wouldn't want to give him a dual mandate of fuck off amd die.
This crap is coming from Paul Ryan and i suppose in some twisted way the economy and all Americas ills will be blamed on some liberal agenda forced upon the fed of "full employment"

So if this dual mandate is so bad and too complicated how about we don't worry about inflation and just worry about unemployment ? Correct it's a fucking stupid idea to ignore something so fundamental to score a political point. Besides ben has said many times inflation is an easy one to control.

With a workforce that actually works and produces all the other crap takes care of itself and we can all get back to worrying about what the stains are on the interns dress.

So fuck off with your stupid political shite. Fuckers.

Umh's picture

You know what the problem is; you came right out and said it.


"With a workforce that actually works and produces all the other crap takes care of itself and we can all get back to worrying about what the stains are on the interns dress".

Racer's picture

"Federal Reserve has a dual mandate to pursue price stability"


2% inflation is NOT stability, over a worker's lifetime that is a massive amount of inflation.

Fox Moulder's picture

Thanks, I was just about to post the same thing.


Zero Govt's picture

The Fed is either asleep at the wheel or its public mandates from Congress are a bloody lie

this month the Fed said they'd take a "wait and see" approach to more stimulus. If the Fed cared 2 hoots about unemployment, which is running at over 8% and not budging, which is up to 800% in excess of its target range of 1-2% unemployment, then it would be running around like Firefighters trying to put the flames out, not sitting on its fat arse sipping tea and twiddling its thumbs

The Feds sloppy, ultra-slack attitude as shown in its latest news release proves the lie The Fed does not only not give a shit about its public mandate, is wholly incompetent at achieving that public mandate, but the entire sham is just a lie to cover its corrupt private monopoly on money with a liberal window dressing

The Fed is a painted face on a criminal cartel

Todays Thought Crime: Stop Paying Your Taxes.... End the Fed

Shelby Moore III's picture

The above chart does not capture the inflation that the Fed has been exporting to China. Now that China has hit the wall, the inflation expectations are moving back home, and thus the Fed's power is greatly diminished.

LetThemEatRand's picture

You finance guys have a tendency to see the world through the lense of the Fed, economic policy, taxes, etc.  The Fed is just a bunch of bankers. Taxes are a cost of doing business and funding the infrastructure that feeds commerce.  The West is declining because the oligarchs enriched themselves through slave labor in Asia and elsewhere, and by creating tax loopholes that allow them to benefit from advanced economies without paying into the infrastructure.  End the Fed, but please guys, wake up to the reality that industrialists with few exceptions don't give a flying fuck about the middle class.   The answer is not to let them loose and give up elected government.

Umh's picture

Pure democracy is the problem. When people get a vote whether they produce or only consume the system will spiral to it's death. There are to many people out there who just want to "get over". I'm sure I can ramble on about this topic, but the point really is this short.

shovelhead's picture

We need more overpaid Federal bureaucrats w/ 90% retirement bennies to police those lemonade stands that are potential consumer deathtraps.

"Good jobs for good wages."

Mike Dukakis.'s picture

If you haven't given up on elected government then you have a choice of Romney or Obama for President. Which candidate do you prefer and why?

falak pema's picture

you cannot GIVE UP on elected government. You can give up on two party elitist corruption, by creating a NEW political force to elect via bottom up ground swell.  Don't throw away a tradition to which you have no practical solution as replacement. Power NEVER works in a vacuum.

Anarchy always begets despotism. Anarchists are, have been, the useful idiots of history. 

disabledvet's picture

Bank of North Dakota is known as "a Federal Reserve bank but for the State of North Dakota only." And I take note "the lowest unemployment in the USA is in North Dakota." And yes...they have a serious inflation problem too. Just ask the strippers coming in from Vegas. "5,000 a night and i still can't make ends meet" from what they told me.

Ponzi_Scheme's picture

Andrew Jackson predicted what ?

Ross Perot predicted what ?..

I am Jobe's picture

Dumb Fuck Population keeps electiong the same old fucks back in office. Shows how fucking inbred USSA is

Makati66's picture

Unemployment is NEVER going to come down. There is no reason it should. Jobs are disappearing, not increasing. All the DC propaganda is just that, BS in huge piles. It is the growth spiral in reverse. People lose their jobs, buy less, more people lose jobs, they buy less, etc. Corporations will go out of business because what they produce is not a necessitiy. As the spiral down gains speed, the collapse will happen. Reset to a whole new economy NOT based on growth.

Snidley Whipsnae's picture

Enemployment is never going to come down? Max Keiser has a new theory... If you want a job, go to jail. The prison industry is putting lots of people to work and the taxpayer is paying ~ $44K per prisoner per year. The gov tells the tax payers that they get cheap consumer goods from prison labor but does not mention the cost of locking people up. Now small businesses that are competeing with prison labor are going bk. Only in America!

This is one of Keiser's best, and funniest videos...

falak pema's picture

glad to see the current economic madness has not diminised your sense of humor!

Atlantis Consigliore's picture

Screw the FED, its the cause; of failure of feww mkt system. 

send Berflunky and Keynes packing,   we need Milton Freedman,  Hayek philosophy.


25 Million small businesses vote with a capital strike;

lay-off W-2 employees, rehire part-timers only, and 1099 independent contractors all of them;

and starve the FED Beast and Govt into B Kruptcy

3rdgrader's picture

"Monetary policy typically has a devastating effect on the labor market"