Fed Report: No More Monetary Gas Needed
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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