U.S. jobless rate forces Yellen's hand on Fed guidance

Comments (17)
Mott wrote:

This unemployment index lost its basis a while ago because of the following -

- people dropping off of labor force for the lack of jobs over long period of time

- the recent decrease in unemployment being mostly the result of businesses reducing the hours of existing employees and distributing to some new employees to skirt the ACA benefits coverage requirements

Given the above, hardly there is a case for Fed to ease anything as we’ve seen this action in the past only resulted investments abroad and did little to improve local employment.

If you truly want to make some change, consider VAT on imports or similar – short of that – you can’t have both – free import of products and increase in local jobs.

However, you can play with these figures and fool people, as this article shows – job losses on one side and employment decrease on the other.

Feb 07, 2014 1:56pm EST  --  Report as abuse
gregio wrote:

How appropriate that Yellen, a woman, gets to choose the impossible, either the rock (inflation) or the hard place (QE reductions). Too bad she is too classy to just tip over the coffee pot and walk out.

Feb 07, 2014 2:35pm EST  --  Report as abuse
brotherkenny4 wrote:

She’ll guess like the rest and hope for the best. Economics is a BS art that has lately been dominated by less than intelligent people whose primary motive for being in the field is to get rich themselves. I seldom see anyone of any intellect working in banks or other money businesses. And for sure, they certainly have no national loyalty or care about other human beings.

Feb 07, 2014 4:49pm EST  --  Report as abuse
GCGriswold wrote:

Let’s hope the Lady is a good choice and prudent in her policy decisions. Our Nation does not need a financial or fiscal fiasco from the FED!

Feb 07, 2014 5:49pm EST  --  Report as abuse
EconCassandra wrote:

Actually, the real problem with the US economy today is that it has had an “activist fed” since Greenspan.

The Bernanke fed exacerbated the problem by becoming even more activist, to the point where it made significant economic policy errors — supposedly to correct what the Greenspan fed had done (e.g. the dotcom crash and the 2007/08 housing market crash) — by expanding the money supply through QE (i.e. Quantitative Easing, which is basically the equivalent of printing money).

That is why we are in the present predicament. Too much money (i.e. liquidity) being made available to the financial system(s). Too much money creates a speculative environment in which normal risks are disregarded.

The last time the US had an activist fed was during the 1920s under Benjamin Strong. It was really the fed policies of too much liquidity in the markets during the 1920s (i..e the so-called Roaring Twenties) that created the unsustainable growth in the US economy.

ALL of this is really as simple as that.

The problem now is how to “drain” the excess liquidity from the global markets without having them collapse.

There is NO known answer to this question.

Feb 07, 2014 6:09pm EST  --  Report as abuse
Boat52 wrote:

The greatest fear for The Fed is to watch interest rates significantly increase and the Federal Government have exponential higher interest costs in the budget. It would become a spiral that is unthinkable, but very possible.

Feb 07, 2014 6:33pm EST  --  Report as abuse
Whatsgoingon wrote:

@Boat52 the fed has no business in either jobs or government finance. It has tried and failed on both, at the same time lost its primary tool fighting inflation. This only “benefit” is delaying the inevitable. Now that the stage is set let’s sit back and enjoy the show: Beauty and the beast (who’s put on drugs without a rehab plan)

Feb 07, 2014 9:12pm EST  --  Report as abuse
Jocomus wrote:

Now we may have low unemployment rate but with sluggish job creation that Fed previously ignored as a benchmark for policy move. How Yellen’s leadership role played out will affect the prospect of Hillary Clinton to win next presidential election.

Feb 07, 2014 9:20pm EST  --  Report as abuse
Whatsgoingon wrote:

@EconCassandra I agree with you. Our system was designed to function when the fed and the politicians maintain independence. When the POTUS started creating “American dream” all hell broke loose. After the housing bust it tried to clean up the mess by bailing out the banks, when it still didn’t work QEs came into play…
Now we are stuck with printing $1T a year to keep afloat. Even if we stop it right now the several trillion dumped into the market require a major world war to wipe out – could this be the answer you look for?

Feb 08, 2014 12:52am EST  --  Report as abuse
Verpoly wrote:

She is due to testify before congress coming Thursday and probably would vow to stick to pledge of downsizing bond repurchase, despite flexibility of a hinted skip at one or two Fed meet. Economic data released in February thru early March may not warrant that skip.

The easy-money-going Bernanke was one of a kind aggressive. The new FED board seems aimed for a neutral monetary policy.

Feb 08, 2014 1:53am EST  --  Report as abuse
tmc wrote:

I’m afraid that with the pullback from emerging markets, we will get what we wanted and there will be more investment directly in the US economy. But that may bite us as since there is still no more demand, the investments will go to more modern automation to reduce costs and increase productivity (spin talk for reducing payroll). So some manufacturing may increase but jobs will decrease more rapidly than before.

Feb 08, 2014 7:18am EST  --  Report as abuse
EconCassandra wrote:

@ Whatsgoingon –

Yes, the fed nominally reports to Congress, but there is no direct control exercised, supposedly to maintain independence from political influence. While this would seem to work on paper, an independent fed creates yet another branch of government that answers to no one for its actions. At this point the fed chairman(person) is arguably the most powerful person in the world, simply because the fed controls the amount of money in circulation by both direct and indirect methods. Thus, the issue of the American Dream and the POTUS are unrelated to what is happening to the US and global economy.

The crux of the problem is the fed’s independence. It is argued that the present financial systems have become so complex that no one person can possibly comprehend them. When a policy mistake is made by the fed, as happens from time to time, it can literally have global repercussions.

The loose money policies of the Greenspan fed (1987-2006) helped to create a worldwide speculative bubble just at a time when the global economy was expanding due to paradigm shifts in technology which made it extremely profitable to make capital investments in emerging markets. This created a global financial system that was essentially beyond the ability of any one nation to control it. And that is where it stands today mainly as a result of the Greenspan fed policies.

When Ben Bernanke took over as fed chairman (2006-2014) the global economy was already completely out of control due to too much liquidity in the financial markets, and ultimately crashed in 2007-08 as a result. Prior to that, however, he was on the fed’s board of governors and helped shape some of Greenspan’s policies (2002-05).

Bernanke’s publicly stated position was that the fed had contributed to the severity of the Great Depression by not being more active in creating liquidity in the system. Thus, he proposed a much more radical and activist role for the fed, which resulted in the QE programs by which the fed bought bonds to increase the amount of money in the financial systems. The theory was that to avoid another Great Depression, the fed needed to increase the amount of money in the economy.

However, this theory was fatally flawed, since without any controls over where the additional money could be used to spur economic growth, investors actually increased the amount of money going into the emerging markets. Thus, the QE programs actually flooded the global economy with additional money when it was already drowning in an excess of money since the Greenspan fed’s mistakes.

That is how we got here. Now Yellen is taking over and is faced with the prospect of a global economy that is suffering from a huge flood of money that has been flowing to speculative investments since Greenspan began his loose money policies. This was compounded by Bernanke’s monetary policy mistakes.

As I said in my original comment, the problem is an activist fed that failed to understand the effects of loose money policies since at least the late 1980s.

There is no known way to correct what is literally decades’ worth of mistaken monetary policies by the fed without the global economy collapsing when the money is withdrawn.

I don’t know if Reuters will allow this comment, but it is the truth and people deserve to know what has happened and why.

Feb 08, 2014 9:01am EST  --  Report as abuse
EconCassandra wrote:

@ tmc –

The pullback of funds from emerging markets that began last May with the first announcement by Bernanke of a “tapering” by the fed is the tangible evidence of the excess liquidity that that exists in the global financial markets due to fed loose monetary policy.

Unfortunately, this will not increase US jobs (except minimally) because the factors that made it more profitable to invest in emerging nations still exist.

Even after the QE is withdrawn the fed is still dedicated to leaving interest rates “at or near zero” indefinitely. Interest rates “at or near zero” are inflationary without any additional QE programs. Stated another way, the loose money policies that began with Greenspan will still be fully in effect. Thus, getting through the “taper” process without serious repercussions doesn’t guarantee anything going forward.

This is a very complicated issue that depends upon many factors too numerous to name in this venue. Much will depend upon the stability of each of the emerging nations as the QE is ended, supposedly later this year. All of them are showing evidence of economic strain already. If this continues, the global economy could collapse. If that happens, it puts the solution beyond control of fed.

Or the emerging markets could stabilize at some point and investor confidence could be restored, thus renewing investment capital flows once again (albeit at a much higher rate of return).

Or we could get a Black Swan event, which is something totally unexpected.

We are “off the map” on this one.

Feb 08, 2014 9:41am EST  --  Report as abuse

Benjamin Strong was the president of the New York Federal Reserve Bank and was quite the activist as Cassandra says. There were three Federal Reserve Chairmen during the 1920′s, Charles Hamlin, William Harding and Danial Crissinger. While Strong was never the Fed chairman he was very influential.

There is an aspect of Mr. Bernanke’s expansionist policies that I don’t often see mentioned.

What occurred in 2007-08 was a liquidity crisis. Simply put, credit is based on two concepts. A borrowers ability to pay and willingness to pay. We had borrowers from individuals to multi-billion dollar corporations who quickly became either unwilling or unable to pay due to an over extension of credit.

The Federal Reserve is the lender of last resort. It’s complicated but essentially it’s where banks can go to get resources when no other resources are available. In the 2008 area there were few “other sources” of funding because we had a crisis in confidence. I wouldn’t lend to you because I didn’t trust that you would pay me back. Our system is much more complicated but, essentially it’s as simple as that.

People complain constantly that the Fed created too much money through various stimulus and “QE” programs. The federal government helped too, think of the treasury programs and cash for clunkers.

I believe that these initial programs were essential to stabilize a system that for many reasons was seriously out of whack. Some believe that the world was flooded with money via Alan Greenspan’s generous monetary policies. However this thinking fails to account for the vast destruction of wealth as the credit system collapsed. Clearly action was required.

The question isn’t was action necessary, the question is did the Fed go too far? We will only know the answer to that question in the fullness of time.

Anyone who professes to know how the final chapters of the crisis of 2008 will end is deluding themselves. The resolution is not knowable because we do not know how economies and central banks will respond to events that have yet to occur.

Feb 08, 2014 10:28am EST  --  Report as abuse

Rapid drop in inflation my A$$!

Feb 08, 2014 11:25am EST  --  Report as abuse

…correction – Unemployment :)

Feb 08, 2014 11:26am EST  --  Report as abuse

This article contains inaccurate and misleading information and conclusions. It’s a good example of the gross mistakes that occur when a journalist who never studied economics consults the “analysts” and “business economists” working for the PR departments of large financial institutions who also never studied economics.

No trained economist believes that the official unemployment rate has any significance of any kind or that the Federal Reserve affects the economy by running its “target rate” up or down.

The actual unemployment rate computed using the very good numbers in the Current Population Survey and the labor force participation rates during times of prosperity suggest the actual rate is about eighteen percent – and getting worse.

Similarly, the target rate of interest that the Fed sets is totally meaningless because no commercial banks borrow money from other commercial banks for 24 hours and use it to make consumer and business loans. That’s a confusion that the elderly officials of the Fed and their students make because eighty odd years ago Keynes correctly said that changes in the UK bank rate at that time would help (and it would have). The Fed officials not so insignificant problem is that the UK bank rate of the the Keynesian era in the UK is not the same as the Fed’s target rate of today’s US era.

Attention Federal Reserve: We need the theories and policies Stigler and Lindauer suggested for today’s US economy; not the theories and policies Hayek and Keynes suggested for the UK of eighty years ago.

Feb 09, 2014 12:20pm EST  --  Report as abuse
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