In December 2008, two brief conversations from Ms Yellen and Mr Bullard appear to have set the scene for both the scale and focus of the Fed's actions over the ensuing years... ironically it was Janet Yellen's fear of a "rising" labor force participation rate and Jim Bullard's rapid realization that the US was "moving to a Japanese-style deflationary, zero nominal interest rate, situation at an alarming pace." Topics that now are quickly ushered away as nonsense by the mainstream economist crystal-ball gazers...
Yellen sees a rising labor force participation rate, fears a rising unemplyment rate, and lays out the 3 areas on which to focus to fix that...
YELLEN: Turning just very briefly to the labor market, the Beveridge curve chart that Stephanie presented during her briefing suggests that we have seen an unusually large increase in the unemployment rate recently in comparison with the decline in job openings, at least in the JOLTS data. I think one interpretation might be that the unemployment rate has risen in part because we have had an unusual rise in labor force participation during this recession.
Labor force participation has been higher than would be expected, particularly for three demographic groups: young adults, married women, and older workers nearing retirement. Analysis by my staff estimates that this rise in participation could reflect behavioral responses to unusual credit constraints and wealth declines.
Specifically, young adults aged 20 to 24 years appear to be entering the labor force in unusual numbers, and that might reflect diminished access to student loans.
Similarly, more married women are entering the labor force, and that’s a possible reflection of diminished access to home equity and credit card loans.
Finally, an unusually large number of older workers are in the labor market, and that may reflect the negative wealth shock associated with the collapse of housing values and the plummeting stock market.
All in all, I expect the anomalous increase in labor force participation to put continued upward pressure on the unemployment rate.
And what happened - the Fed/Govt juiced student loans, piled liquidity into car loans, and smashed home and stock prices up... and the labor force participation rate collapsed and so did jobs...
Then Bullard comes out all "shock-and-awe"...
BULLARD: In sum, I think we are moving to a Japanese-style deflationary, zero nominal interest rate, situation at an alarming pace.
To stay in the game and control expectations, we need a Volcker-like transformation, something like—although the situation is different—the ’79 announcement, which knocked private-sector priors off the idea that they should trigger all reactions to announcements on nominal interest rates.
You need a dramatic move that emphasizes this new reality. Continued focus on the federal funds rate at this point would not face that reality.
Now, of course, the Labor force participation rate is collapsing, there are no jobs created by the energizing of those credit lines and the Fed is desperate to dismiss any perspective that we are turning Japanese.