The Wrongologist

What’s
Wrong Today:

The
problem with researching a topic to bring to readers of the Wrongologist Blog is
that events can overtake the narrative.
A good example of this happened yesterday. The Wrongologist criticized the
Federal Reserve for ignoring one of its two primary objectives, using monetary
policy to grow the economy rather than just to fight inflation.  

So yesterday afternoon,
the Fed blunted that criticism when the Federal Open Market Committee (FOMC) did
a great thing: For the first time, the Fed now has numerical
thresholds for both the level of unemployment and inflation to guide its
decisions on raising the Federal funds rate.

The FOMC essentially
adopted the “Evans Rule”: It
promised to keep interest rates near zero at least as long as the unemployment
rate remains above 6.5%, unless the inflation forecast ticks above 2.5%.

That’s Charles
Evans, president of the Federal Reserve Bank of Chicago, who some have credited
as a key force behind this surprising move by the Federal Open Market
Committee. Evans has been pushing his colleagues on the FOMC to
adopt a specific threshold of unemployment to guide its decisions on when to
raise short-term interest rates. 

The messaging is powerful. The
Federal Reserve is finally saying chronic high unemployment matters.

A
little history:

 

We owe
a debt to Augustus
Hawkins, Hubert
Humphrey, and Henry
Reuss, DC legislators in the 1970s, who pushed Congress to give the Fed its dual mandate of low
inflation and maximum employment.  In the context of the
1970s—with both high inflation and unemployment—a Democratic Congress moved to
strengthen its oversight of the Fed—requiring semi-annual reports to Congress
and expanding the Fed’s statutory mandate. 

Bernanke reminded us in his
press conference that the long-term unemployment rate is not driven directly by
monetary policy. In that sense, the 6.5% threshold is more “guidepost”
than “target.” 

However,
after thirty-five years of the Fed’s benign neglect of its employment mandate,
the FOMC’s move is remarkable. One of the most important legacies of the Bernanke Fed may be this
effort to take both elements of its mandate seriously.  

If only Congress and Wall Street
would do the same: Tie policy directly to the employment of America’s citizens.
Over and over again, Congressional policy leaders avoid tying tax rebates to the hiring
and retaining of US citizens, something that the Wrongologist has asked for here.

Americans are last on
the list for consideration in employment, yet first up for
destruction of their jobs, social security, pensions and social safety nets.

The Committee seems to be concerned
that, without sufficient policy accommodation, economic growth might not be
strong enough to generate sustained improvement in labor market conditions.

As described yesterday, more than 40%
of the unemployed (about 5 million people), have been without a job for more
than six months and millions more say they would like full-time work but have
been able to find only part-time employment, or have stopped looking entirely.

The prevailing conditions in the job
market represent an enormous
threat to our society while wasting human and economic potential. The FOMC recognized that in their projections
of future unemployment released today:

(Extract by the Wrongologist. Numbers
reflect % of headline rate unemployment)

 

	2012	2013	2014	2015	Longer Run
Unemployment Rate	7.8 to 7.9	7.4 to 7.7	6.8 to 7.3	6.0 to 6.6	5.2 to 6.0

 

Note
that the Fed thinks that unemployment will remain stubbornly high through 2015;
and remain above 5% for the long term, without getting back to the 2007 level
of 5%, or the 4% unemployment rate we
saw in 2000.

 

This
shows that the FOMC believes American labor will suffer for years to
come. They stated they do not expect unemployment to go below 6.5% until
mid-2015 and that means the federal funds rate will stay effectively 0% until then.

The message hidden in the FOMC announcement is to
America’s employers: Work
matters, employment matters and businesses operating in the United States,
bottom line, are working against our national goals by not hiring her citizens.

Nice Work FOMC!