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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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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).
I see that you have no notion how much training is required just to get an unpaid position with the local Dry Springs Volunteer Fire Dept.
If it's your house, there is no training at all. One chain saw, a mower, and 3 days are all it takes to secure your own land. Oh thats right, if you can afford it.
Many would question the BK statement, following the US government line, that « ... Current unemployment is 8.3%. »
ShadowStats and others have long discussed how the US figures would be different if they used older formulae from previous decades
Mr Williams most recent ShadowStats figure for total US unemployment and underemployment, was, I think, something like 22.9% ... making the US a rival to Spain, which has the worst unemployment in Europe.
That dimension of unemployment ... which Ben Bernanke also no doubt understands ... is perhaps also a factor in Bernanke's mind, as it factors into the CIA formulae for when revolution in America might begin to take hold against the US regime.
All of the stats on employment/unemployment are flawed. I agree with you, no one really knows what the numbers are, and if we did, they propbably would be higher than what we are getting today.
But....
The Fed has set the yardstick, and it has used the "full employment = 6%) definition (flawed or not). They could change their stated approach and say that they are now focusing monetary policy on U6. I don't see that happening.
"there is nothing left that monetary policy can accomplish"
Bruce, that would be true if the Fed's primary concern were unemployment. But I see no evidence that this is the case. If it were, the U-6 number would already have triggered QE3 through QE5.
The one thing that monetary policy can still accomplish is to repair (once again) the deterioration in tier capital ratios at the primary dealers. There is a lot of decaying derivative paper on and off TBTF balance sheets. As long as real unemployment remains high, real wages keep falling and you can live in the bank's house without making a payment, this is only going to get worse.
Is that like the formula for new math -vs- the old math formula? Or does Ben not have kids??
Oh yes, blame the jobless for not seeking a job in the areas that have (some) jobs. All those guys from HP could of course easily work as Walmart-clerk or actors in street theaters. Or are they intended to go for the low wage jobs the mexican immigrants are doing actually? Nice talking off the comfortable chair..
I had a difficult time reading the report. It is very technical.
I don't think the authors were 'blaming' anyone. I think they were trying to quantify something that is a factor in the unemployment equation.
There are structural impediments that have added to the unemployment woes. The Fed can't fix these kinds of problems with monetary policy.
The report was clear that only a portion (1/3) of the increase in prevailing unemployment is related to structural issues.
I just can't help but thinking the larger number of economists and reports written at the fed, is to white wash, and legitimize the actual decision making that gets done in a closed room around a beautiful wooden table with a number of old white bankers sitting around it talking about what needs to be done to keep their rackets stabile and thriving.
managing a monetary system is NOT rocket science. when the markets threaten to explode you print. that's the basic logic. the process of determining whether and explosion is coming is about as kintergarden as they get; the table of white bankers starts talking and maybe sometimes raising their voices or intimidating each other and in the end a vote of some sort and the decision is done. and probalby not a single voter at that talbe reads these esoteric papers ever. They provide mere smoke screen for far simpler motivations behind the individuals' votes.
This is good for a laugh
Fed Studies Show Damage To Labor Market Is Reversible
snip
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, according to a study released this month by the Federal Reserve Bank of New York. That leaves the remainder due mainly to a lack of demand.
“There is still considerable weakness in the labor market,” Aysegul Sahin, one of the authors and a New York Fed economist, said in an interview. “We see that the weakness in the labor market is not specific to certain groups, such as certain occupations or certain locations. This points to a case where labor market weakness can be attributable to the overall weakness in the economy.”
That conclusion goes to the heart of a debate pitting economists at banks like UBS Securities LLC and Barclays Plc who say the economy has fundamentally changed against central bankers, including Chairman Ben S. Bernanke, who say the distortions are transitory. A permanent shift would mean policy makers applying additional stimulus risk spurring inflation by driving unemployment down too far too quickly, while a temporary dislocation would indicate more can be done.
“There is a structural unemployment problem in the U.S.,” said UBS economist Drew Matus. “The best the economy can do, even if it is performing well, is an unemployment rate that is probably significantly higher than it was pre-crisis.”
in full
http://www.bloomberg.com/news/2012-08-20/labor-market-damage-is-reversible-fed-research-shows.html
It's true. The reality is that those former factory workers will not find the factory jobs they are looking for. Neither will the Liberal Arts graduates find the cushy job doing.. (What is a Liberal Arts graduate supposed to do in the real world?)
But McDonalds is hiring..
"These are not the jobs you are looking for........move along."
damn, can't a trooper catch a break?
Because Bernancke is "no dope", he wont inject the Fed into the prez campaign. To think differently is crazy.
I think that Ben has a chance to get under the political wire if he speaks on 8/31 and says more QE is coming. But after that, the door is shut till 11/25.
The Fed hates to do 'emergency' meetings, so unless there is a true emergency, they won't act in the last 60 days prior to the election.
I'm trying to read into the future here. A difficult thing to do.
Bernanke knows he is on hold after 8/31, so there is a lot of pressure on him to act. But there is plenty of data that says that there is no justification for addition "emergency" measures like QE at the present time.
If I'm right, this plays out in the next 8 trading days. Not much time at all....
In the politically correct entitlement era, the current presidential run up is seen as acrimonious. If you look back in history, the current political climate is actually quite tame, but it's perception that matters.
Comments like Schumer's, "Go to work, Mr. Chairman". leave the incumbent and his party open to charges of buying votes and completely politicising the FED, should it act at the next meeting.
The FED has reiterated through its mouthpiece, that its decision will be data dependant. This distances itself from the political process. The firming of data points is ruling out any pre-emptive actions.
The FED is on hold. Otherwise, Bernanke risks the whole enterprise.
What they do with rabbits and hats vis a vis the ECB and Europe, that's another question entirely.
The FED formula is divide by zero.