Tuesday, November 10, 2009

Fed on Employment: Well, forget the heavy equipment

The other day I speculated that the Fed was paying less attention to employment than most marketeers seem to think. Specifically, I question whether the Fed will wait for an outright drop in unemployment before tightening monetary policy, or if other factors will be viewed as more important.

Today we're getting four Fed speeches, which gives us a chance to see exactly how employment is characterized by the various Fed officials. So the following is the quote on employment from two of the four (Dallas Fed President Fisher doesn't speak until tonight, and Boston Fed President Eric Rosengren made no mention of employment in his speech on the Too Big to Fail problem.)

Atlanta Fed President Dennis Lockhart:

At this juncture, it's hard to be encouraged about a fast rebound in job growth. As you know, last week's employment report pushed the official unemployment rate to 10.2 percent, the highest since May 1983. Net job losses continue on a monthly basis but at a declining pace. Because employment growth tends to lag recovery from a recession and because of factors such as small business credit constraints, my current outlook for employment is one of very slow net job gains once the trend reverses, in all likelihood sometime next year.

If you believe in "very slow net job gains" even once we start getting gains, the unemployment rate isn't likely to fall at all for a long time. It could even rise if employment gains aren't enough to make up for new entrants into the workforce. Still, Lockhart acknowledges that employment lags.

San Francisco Fed President Janet Yellen:

The U.S. experienced so-called jobless recoveries following the previous two recessions in 1991 and 2001, when job creation remained weak for several years following the business cycle trough. In both cases, output growth was less robust than in the typical recovery and, unfortunately, things seem to be shaping up similarly this time around.

Less verbose, but could be construed as the same basic view. Weak job growth "for several years."

My question is, could the Fed hike to some number above zero even if unemployment is above 10%? Yellen and Lockhart are describing a situation where unemployment remains high for 2-3 years at least. What if at the end of 2011 unemployment is better, but still over 9%? I've got to think the Fed would have hiked.

22 comments:

John (Ad Orientem) said...

IMHO, absent a significant improvement in employment or a sharp spike in CPI any meaningful rate hikes will be carried out over Ben Bernanke's dead body.

Accrued Interest said...

I think inflation is important, unemployment less so.

Anonymous said...

CPI will be managed to stay low short of a 1970s style OPEC induced oil supply cutback. The federal government cannot afford CPI to drive year over year changes in Social Security and Medicare given the huge number of persons hitting retirement age and filing for benefits. We are in year 2 of a 15 year run of large numbers of persons filing for social security.

Advant Guard said...

If inflation is important, then one can predict that the Fed will leave the funds rate at zero for several years. The largest component of CPI Owners equivalent rent. For the last few years it has been rising consistently despite the rise in commodity prices and the fall in house prices. But now rents are falling (thanks to the tax credit to move renters into home pretend-ownership.)

Owner-equivalent rent will fall consistently from this point, keeping the "core" CPI numbers well below the Fed's "target" inflation rate of 2%. Given the overhang of housing stock (both houses and apartments) it is hard to make a prediction of went rents (and house prices) will bottom.

In Debt We Trust said...

I found a rate hike very doubtful after Mishkin's convoluted and confusing defense of how low interest rates will not cause a bubble. Or not the wrong type of bubble anyway.

http://www.nakedcapitalism.com/2009/11/mishkin-defend-bubbles-and-of-course-the-fed.html

A bigger problem on the horizon is the refi crunch in the bond mkt. Even though the G20 confirmed lower rates are here to stay (along w/dollar carry trade), that does NOT mean that rates will remain low for everyone else (the non-Primary dealers, you know, regular people).

http://www.ft.com/cms/s/0/7c5bcf20-cd62-11de-8162-00144feabdc0.html

Best CD Rates said...

In my opinion unemployment is getting bigger and even now people are loosing there jobs everyday. 9% of unemployment is a serious issue and need some comments from government bodies.

Anonymous said...

What if the Fed just waits for banks to make enough profits on bonds (due to huge positive carry)to offset losses on commercial & residential loans. Maybe 2 years more like that...

Francois (Paris)

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michaeld said...

Unemployment is still high and climbing even higher.

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Laurent GUERBY said...

The male aged 25 to 54 year old employment ratio is 81.3% in september 2009, the second lowest reading on record (starting 1948).

This means 100 - 81.3 = 18.7% jobless rate.

Of all the five years age range, the best situation is for males aged 35 to 39 where the employment ratio is 84.3, so 15.7% jobless rate.

15.7% is currently the *smallest* jobless rate of all 5-years segment of the USA population.

Note that there is a big issue with the unemployment measure (1948-present) as shown here:

http://guerby.org/blog/index.php/2009/01/24/193-l-inexorable-ascension-de-la-population-sans-emploi-aux-usa

Such a divergence has no explanation.

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