Fed Report: No More Monetary Gas Needed

Bruce Krasting's picture

The Federal Reserve Bank of NY put out a research paper that must have pissed off Bernanke and the other Fed doves. Here is a Link to the Fed report, and another Link to a Bloomberg article with a good discussion.



The report looks at the consequences of structural issues that have impeded the return to “full employment” in the economy. The analysis identifies structural impediments as “misalignments”:


“idle workers are seeking employment in sectors (occupations, industries, locations) different from those where the available jobs are. Such misalignment between the distribution of vacancies and unemployment across sectors of the economy would lower the aggregate job-finding rate.”



Bloomberg summed up the report:


About one-third, or 1.5 percentage points, of the jump in unemployment from 5 percent as the economic slump began to its 10 percent peak in October 2009 can be traced to a mismatch between the supply of labor and job openings.


Huh! One-third of the increase is structural? The structural component of the problem is 1.5%? That’s a very big admission by the NY Fed.


Current unemployment is 8.3%. If 1.5% of that is structural, then the rate of unemployment that the Fed has any influence over is 6.8%. That is well above the Fed’s stated goal of unemployment of around 6%. So Ben and his cohorts still have an excuse for more monetary gas. Sort of.


I wonder if Ben ever considers his definition of “full employment.” The 6% rate that he uses is a number that has historical relevance, but it is a questionable benchmark for America in 2012. The country is facing a rapidly aging society, and keener than ever global competition. In this environment, the definition of “full employment” would have to be higher than the historical standard.


Edmund Phelps (Columbia University – Nobel prize for economics 2006) commented on the “natural rate of unemployment”:


The natural rate of unemployment is around 7 percent, a level to which joblessness could fall over time were businesses to create new jobs through innovation.


If Bernanke were to listen to both Phelps (7% = full employment) and his own staff research (1.5% is structural) he would be forced to conclude that there is nothing left that monetary policy can accomplish.


Bernanke is no dope. He reads his staff's papers and listens to folks like Phelps. He must be questioning the relevance of the 6% target. He knows that there is nothing he can do that would move the needle on structural unemployment. That takes time, and it takes legislative action. ZIRP and QE will not fix it. Bernanke also has to be looking across the data spectrum and he has to see see some of the signs of improvement that the markets are looking at. It's quite possible that additional Fed "gas" will have more negative than positive consequences.


Bernanke will speak at the all-important Jackson Hole meeting on August 31. This means that Ben is writing his speech this week. He will be speaking on the phone with his cohorts about what to he will say. In the process, he will get a consensus from the Fed’s voting members for policy actions that will be taken (if any) on September 13.

If history is any guide in these matters, we will get a Jon Hilsenrath leak from Bernanke by the end of the week. The market wants Jon to say that Ben is going to give it another "big go". I’m leaning in the other direction. I think Hilsenrath will not confirm another Fed LSAP, or a cut in the OIR for September. I think we will get more hints of “Fed Ready to Act if Needed”, but nothing more. Bernanke will try to bluff the market with talk. "Don't worry, I'll be there if things go south".


Say I’m right that the Fed holds its cards in September, and there are no new policy measures. If that is the case, then there is almost no chance that the Fed would act until after the election. Short of a 10% drop in the S&P, or a very big blow-up in Europe, politics will tie the Fed’s hands.


Late November is a very long time from today. The timetable I describe for the next probable date for Fed action is not part of the market “price” today. I think that a fair bit of the recent froth in the market is based on the belief that Bernanke will light a new fire with his speech in the mountains in eleven days.


There is, and always will be, a Bernanke put. But the "Put" is out of today’s money by about 10%. I’m thinking (hoping) that the last few weeks of August will be less boring than the first two were.


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W10321303's picture

Ponzi Scheme is just another name for WALL STREET BANKSTERS!

Michael Olenick: Still Looking for a Housing Bottom

By Michael Olenick, creator of NASTIACO, a crowd sourced foreclosure document review system (still in alpha). You can follow him on Twitter at @michael_olenick or read his blog, Seeing Through Data

Every day a growing crescendo of housing cheerleaders posit the end of the foreclosure crisis. We’re flipping our way out of the mess that we flipped ourselves into, is their usual line of reasoning. I’ve looked at national data, local data, and even data on my own block here in Florida. I tried to make the evidence prove the market has found a genuine, sustainable bottom. There are clearly gimmicks giving a temporary boost, a great PR campaign that may or may not be coordinated, and some foreclosure flippers that may do well, until they don’t. But the evidence is overwhelming: home prices are anything but stable.

For background, a chorus of the same people that created the housing crisis have been predicting a housing bottom every year or so. They’ve always been right for anywhere from a few days to a few months, then the cycle of foreclosures and lowered home values restarts and causes prices to spiral downwards. This time though, especially in certain micro-markets, there does seem to be measured home price appreciation.

Read more at http://www.nakedcapitalism.com/2012/08/michael-olenick-looking-for-a-housing-bottom.html#F286bT2XCf4KXPUD.99

Two trends are apparent. One is that banks are delaying foreclosures, or not foreclosing at all despite long-term delinquencies. The other is that private equity firms – flush with cash thanks to Tim Geithner’s religious devotion to trickle-down economics and the resulting cascade of corporate welfare – have been bidding up and holding foreclosed houses off the market. These two factors have artificially limited supply and, combined with cheap mortgages rates, driven up prices. While we can debate whether these strategies represent the best public policy, these policies are obviously not long-term sustainable.

Using data from the Office of the Comptroller of the Currency’s Mortgage Metrics Report, the percentage of seriously delinquent mortgages was 4.8%, 6.5%, 4.8%, and 4.5% in Q1, 2009-2012 respectively. Foreclosures should follow delinquencies somewhat – a vector of non-payment is supposed to lead to a foreclosure – but, at least according to the OCC, this has not been happening. Delinquency rates slowly fell a little but foreclosure activity dropped through the floor. Stranger still, delinquency rates predictably rise and fall in measured movements whereas foreclosure filing volume gyrates wildly.

Read more at http://www.nakedcapitalism.com/2012/08/michael-olenick-looking-for-a-housing-bottom.html#F286bT2XCf4KXPUD.99

JohnKozac's picture

Unless gas prices come down (alot) and the economy for Main Street improves, Barry's chances of winning look slimmer then Kim Kardashian's G-string.

Robslob's picture


There will be plenty of jobs in America when "professional food tasters" come back in style...then again last time there was a profession like that...uh oh!

diogeneslaertius's picture

sorry sir, the computer says you are deceased

diogeneslaertius's picture

tell me Real Unemployment metrics arent equivalent to > 30% plus in all western countries TO MY FACE

csmith's picture

Thank goodness the true unemployment rate is closer to 12%. Ben still has all the runway he needs...

edifice's picture

BLS reports it as 15%, if you use the U-6 figure (and not the U-3 figure the media uses).


granolageek's picture

I question the reality of most of those "mismatched" openings. I'm a software developer, and I see constant whining from "job creators" that they cannot find appropriate employees.


A bit of investigaion quickly reveals that these folks are attempting to hire a perfect fit at a level of compensation that historically would have been paid to someone of demonstrated competence, but who faced a learning curve in the particular industry and toolset. Non-perfect fits need not apply.


The very few employers willing to offer a traditional level of compensation can pick and choose to their heart's content. If the other openings were real, they would pay (inflation adjusted) 1980s market rates.

boiltherich's picture

They will never admit it but inflation is already raging, we know what prices are demanded of us and those have gone up a lot lately, what we cannot see but the Fed/government can see is what is in the pipeline that will hit us hard only after the elections. The point is that all the shock absorbers in business's ability to maintain prices is gone, at this point their ability to hold down prices for competitive reasons is biting into profits hard. They have to raise prices or die, look at today's Best Buy huge miss, they will have to raise prices or cut costs to remain viable. They can close locations till they have none, they can slash employees till it is essentially self service or online only ala Amazon, they can sell themselves as a subsidiary of another company that will do all of the above like Blockbuster did, or they can just quit like Circuit City.

It means any more QE will be reflected immediately in prices so they can't hide the bailouts anymore. I have been waiting for this to happen, the end of (or extended delay) QE means that the game is up, they are out of ammo now. Necessary items, food, fuel, rents, utilities, for many of us smokes and coffee, for some beer, will roar out of reach while everything else collapses. This my ZH pals is when the world wars begin. We will see hyperinflation in the necessary items and depressionary deflation in all else, till eventually nobody has any money for the necessary items as well, then it is all depression, deflation.

Speaking of inflation, an anecdote for you, while I was posting on another thread this morning I had an e-mail, it was my online billing notification from Charter, it seems my two year bundle of services has expired so instead of the $119 for TV, internet, and home phone, the same services will be $168.16. OH yeah, but they added Oprah and up to 1,000 or unlimited 411 calls, and doubled the speed on my modem, so we can hedonically eliminate any price increase because service is improved. Now I have to decide if these items fall into the necessary category. By the way, in an ominous move they no longer will lock in that price for two years on a bundle, only one year now. How is that for an admission that inflation is speeding up? How long till they offer no price lock in's at all?

For the math challenged this is a $50 per month increase from 119 which is 41.3%. I have had one COLA raise since they announced our 2009 raise in 2008, that was a 3.2% raise announced last year for 2012, so from autumn 2008 to today we have had ONLY 3.2% inflation, and never mind the price increases for everything I have to buy, that is not inflation, there is no inflation. Just the prices you have to pay to live have gone up that's all. Well, I am going to double down on not spending, not paying them their self announced raises. I will switch to dish, do without, or steal what I need, but I refuse to pay more than 3.2% more for anything I have to buy from now on because that is how much the Fed and BLS say prices have gone up.

SAT 800's picture

Agreed. Cancel the Television and sell the set. Whatever isn't wrong with your mind yet will be if you keep exposing yourself.

boiltherich's picture

By the way, anybody have a website for homebrew they can recommend?  I want to start making my own beer now that even crappy old Bud has gone up to more than $8 for a sixer of tallboys.  It would be nice if I did not poison myself or go blind from getting the brewing wrong.  Some of you might like that I guess.  It's not like I go out of my way not to piss off the right. 

SAT 800's picture

If you actually drink Budweiser, one of the gravest problems you will face is adjusting to what Beer tastes like. Bud is not Beer, and Beer is not Bud. The Beer you're going to make contains B vitamins and is actually good for you; but it doesn't taste ANYTHING like Budweiser.

boiltherich's picture

No, not by itself, I like good beer but a lot of it is too strong or too strong tasting for me, so I will buy Bud and pour half a glass then add good beer to flavor it.  I am looking forward to making my own. 

iDealMeat's picture

Nothing in the process of beer making can harm you..  save burning yourself..


Start with a kit..   http://www.monsterbrew.com/


IthinkMyHeadsGonnaExplode's picture

Not to mention that (fat) Federal employee salaries pensions and benefits are keeping pace with inflation quite nicely thank you very much!

IthinkMyHeadsGonnaExplode's picture

One way to fix the structural mismatch is to start issuing H1 visas to those foriegners that can fill the positions. At least they would be paying taxes, rents, mortgages etc... The jobs that can't be filled by Americans are either going to get shipped overseas or they will be filled by H1 bodies... Might as well keep the money in-house...

granolageek's picture

Those jobs would be filled by Americans if they paid what they used to. The whining for H1s is simply an attempt to lower American wages. If the jobs could go overseas, that would be even cheaper than the H1s.

KevinH's picture

"Huh! One-third of the increase is structural? The structural component of the problem is 1.5%? That’s a very big admission by the NY Fed."

Granted I only did a cursory read of the Fed paper, but I don't think this is their conclusion. Their argument is that 1.5% of the unemployment rate is a result of a mismatch in search criteria between job seekers and job openings. For example, you are looking for jobs in NY when there are jobs in TX (location), or you are looking for a job as an Ibanker when firms are hiring accountants (occupation, skill). This looks like an empirical study using the search friction idea from Diamond-Mortensen-Pissarides nobel paper. 

So in fact, the 1.5% increase in unemployment from the study is not a gain in structural unemployment; rather, it's a transitory increase.

onebir's picture

"So in fact, the 1.5% increase in unemployment from the study is not a gain in structural unemployment; rather, it's a transitory increase."

But not something amenable to a monetary policy response...

KevinH's picture

Sure, but Bruce's conclusion that there has been a 1.5% uptick in structural unemployment is wrong and the implications are vastly different. With a 1.5% uptick for structural unemployment, it means that the Fed employment target (should you buy into this mandate) is in the 6.5 - 7% range. This means the current official unemployment rate is at best, 2% above the target. 

This Fed paper actually suggests the complete opposite, that there has not been an increase in structure unemployment. It's suggesting that the spike in unemployment is reversible by doing things to reduce job search friction. This is why the bloomberg article is titled "Fed Studies Show Damage to Labor Market is Reversible." I can see why Bruce Kastings got confused and concluded with a rise in structural unemployment because that's what alot of the people interviewed in the Bloomberg article talked about, but this is not the conclusion of the Fed study. 

As for whether monetary policy can alleviate this problem, I don't know.

OpenThePodBayDoorHAL's picture

The real problem is that there are people who believe a formula like the one shown in the paper can possibly describe or predict human behavior in a mega-complex system like a world economy. I mean, these are priests fingering through chicken guts to try and predict the future.

Set Our Money Free! Let it find its natural price fer chrissakes. How obvious is that.

MeelionDollerBogus's picture

Sadly human behaviour is incredibly predictable about how to cause fear, how to steal a lot by stealing a little at a time from a lot of people, and how to make a lot of dumb adults by ensuring as children they are taught lies and punished for proving they are too smart (some are) at a young age to be fooled (turned into criminals, attacked by adults, put in psych wards, etc.).

The idea this is all too complicated to figure out is fraud, not your fraud but one passed down to you.

The fine-level details are hard to predict but also have little change to the total outcome. The total outcome is "how much will they steal" and "how much will you resist" and "what safe-havens can you create and/or identify" by terms of asset, location & timing.

That's it.

The entire act of it a) being overly complex and b) they (governments, central bankers) being "so clever" they can navigate this complexity is Kabuki theater. It's all an act.

When you boil the results and the inputs down to their basics the predictability is incredibly obvious. The hardest prediction on that basis is simply "how quickly will some figure it out" and "who will those people be"

IthinkMyHeadsGonnaExplode's picture

Seems like we are just one step behind the Eurozone in our inevitable demise... Maybe we'll get lucky and Germany will declare war on the USA again.... 

BRoquet100's picture

Ahh... Derivatives... This is not a good thing. Wait till that bad boy pops.

tu-ne-cede-malis's picture

"Natural rate of unemployment."  What a joke.  "Natural" implies unhampered by the Fed with monetary policy, and the Government with regulations and quasi price controls.  These positivists...total morons.  They will be the laughing stock of future generations.  If we make it that far.

disabledvet's picture

Bunch of dinks with slide rules. The Chairman has a technology put "to use as he sees fit." this report is garbage...there are no unions in the private sector hence the only limit on labor growth is the ability to have a "battle royal" between tech and energy and "see how much hiring commences." I say go for it. Governments are all bankrupt anyways.

mewenz's picture

"There is, and always will be, a Bernanke put."

Bruce, like your stuff and know you are not saying you approve of this but just a comment...

Amazing how we've reached the point that we just accept that unelected, unaudited bankers have complete and total power to  eliminate market based pricing and therefore any accurate form of even roughly efficient capital allocation.  Where in the long history of mankind has this shown to be the right thing to do over the longer term?  Just amazing the bankers have moved the needle of public discourse so far.  When do I get my next issue of Pravda?

randomdrift's picture

Farmers can't find enough agricultural workers to pick the crops in California. No Americans will apply for those jobs. They will do Low-paid back-breaking labor but not if they have to work with Mexicans.  They don't want to be murdered for doing it. --- Clear them out of our country. Only then, will the young people pick the fruit and vegs like they did when I was that age.  ---  That is what I call a "fundimental structural problem." 

MeelionDollerBogus's picture

at $3/hour a Mexican farm-worker can afford to sleep outside.

An American who has bills to pay would be in debt with no job and more in debt with the farm job. Farmers need to make honest deals for work, pay in good wages & with food deals on fresh food. Corporate farmers, giant factory farms, need to be put out of business so real farms can do this great hiring. Workers want to work, including on farms - but with gas cost going up, wages going down, a need to eat more to do more hard work and to eat healthier, a person left with not enough wages to pay for healthy food to do productive work will collapse or figure out ahead of time this is work paid too cheaply to even justify driving there much less moving there.

Unfortunately the poison-inducing factory-farms, the same farms that put hormones into meat that will sicken you, put anti-biotics into their jam-packed-together animals so that those same medicines do NOTHING for you when bacteria resistant to everything finally get to your plate, have used their dangerous and often unlawful profiteering (from doing harm to others as I just outlined) to destroy us all by bribing lawmakers and police.

Truly in a free market we'd have never allowed such subsidies, looking-the-other-way and propping up by big-pharma which is part of factory-farming (a huge part).

The world needs more farmers which means more people need to buy farm land and learn to be farmers, not just be farm workers. Corporate big-ag backed by big-pharma needs to be knocked down to its knees or destroyed. It serves to sicken & to profiteer from doing such harm in ways no free market, no informed individual, would consent, implement, tolerate, permit by any means.

Lost Wages's picture

Sounds like supply-side newspaper fodder. Did anyone even know those jobs were available or were they not even offered because the employers knew people would demand a living wage and human rights?

markar's picture

"Only then, will the young people pick the fruit and vegs like they did when I was that age.  ---  "


That's the funniest thing I've read all week. (You WERE being sarcastic, right?)

IthinkMyHeadsGonnaExplode's picture

That was hilarious.... I had to go for a ride in my Stanley Steamer just to get some fresh air after that one...

asteroids's picture

The  jawboning is now tired and won't work for much longer. I would not be surprised if folks actively start becoming hostile towards the FED. Were it not for the printing press these bozo's run, do you think anyone trust or think them credible?

adsanalytics's picture

Pushing on the labor market string? Structural problems are at the core of problems facing workers: long-term unemployed (after the jump), skilled/unskilled gap, race gap, labor force participation rate and productivity. It's not at all clear the White House (much less the Fed) can adequately deal with them.



DeltaDawn's picture

The collapse is intentional, let's not forget. The best use of 1.5 hours of your time today would be watching, "Why in the world are they spraying?" which explains only one of the soft kill weapons the powers that be are using against us. 

export manufacturing base

supress energy self-sufficiency

dumb-down education

control the press

morally corrupt and distract with bread/circus

build up domestic "security"


overwhelm with debt and immigration

put in place executive orders

exhaust financially with endless war

create distructive weather

When we resist this tyranny, they will use force.


barliman's picture


Good post, Bruce.

Jawboning has carried the Fed through the last 14 months. With the current unemployment numbers, PCE and the markets up - jawboning is going to be served again at Jackson Hole.

The S&P just made a new high for the year. I think 10% off that number is insufficient grounds for the Fed to do more QE.

My estimate would be 20%, at a minimum, for the Fed to decide they "had to act" before the election with an additional  -1.0% for every week closer we get to November 6th.

Anything less than 20% on August 31st trailing down to 30% on November 7th - and the Fed makes a strong case for a vast curtailing of its power in 2013.


Ying-Yang's picture

Ahhhhhh..... How about with corporations flush with CASH, can take on the hiring and training for their own needs. In my business I hire based on quality of the person and then train new employees. What a concept.

If big corporations did not have the cash I might understand.... nope big corporations suck!

MeelionDollerBogus's picture

He knows that there is nothing he can do that would move the needle on structural unemployment. That takes time, and it takes legislative action

GRR. No, it takes people to stop being derps and go get retrained. Whether it's short-term government dollars (grr) paying for it or personal savings with no bank loans and none of these nonsense print-your-degree "schools" (grr) then the mismatch can stop.

People need to constantly seek new skills. There's no way around it. Survival is for the fittest. The survival rate for everyone drops to zero but for some it comes much sooner than others.

To claim legislation has any power over this is pure nonsense.

3 fuckers have gone full-retard and think precisely the opposite since reading this comment, apparently

NEOSERF's picture

Change the rules, change the yardsticks, presto changeo ...no problem anymore...the new natural unemployment rate is 10%...things therefore are good

Juan Wild's picture

Bernanke knows deep down in his teeny-weeny black heart what he needs to do to help unemployment. But he can't. He can't because its his job to create more unemployment and devalue the dollar so people can not afford food and gasoline anymore. So people can lose their homes. So people can get angry. So they can riot. So they can go to FEMA camps.

bye bye Miss American Pie
drove my Chevy to the levee
but the levee was...

timbo_em's picture

My guess: Printing will start in december.

fonzannoon's picture

a 10% correction from here is all it takes to get the Bernak to come running in off the sidelines? Scary...

ptoemmes's picture

"Short of a 10% drop in the S&P...."

What about any impact  in the context of ever increasing "warnings" of up to a 25% drop in S&P due - mostly I gather - from inaction on the part of USA CONgress re: The Fiscal Cliff?  A few days ago it was Goldman (gulp), but just today Bob Janjuah sounding the alarm.  I figure this starts - if at all - post Nov 6 election.




skipjack's picture

So where ARE all these jobs that are just waiting for someone to fill them ???  Inquiring mnds want to know.  Other than the Bakken Field, nothing seems to be prospering...

DosZap's picture

So where ARE all these jobs that are just waiting for someone to fill them ??? 

All at Wal Murts,Tarjay,K Murt,Dollar Stores,Custco's, Sammy's, and all at $6-10.00 hr max, and no 40 hr weeks.

There's your JOBS.

My $$$ is on NO QE,or any other stimulus,we are entering home stretch.

markar's picture

Really? I'd love to know what municipalities out west have the funds to hire firefighters.

NotApplicable's picture

Ones that are not within the boundaries of a coastal state that allow for extraction of valuable commodities.

Wyoming and the Dakotas are boom states right now, and many places have housing shortages (if one could imagine such a state).