Saturday, January 15, 2011

What is the Fed’s Next Move?

Popular Economics Weekly

Minutes of the last January 14 FOMC meeting were just released, and may give us a hint how long the Fed will continue to support its QE2 quantitative easing program. The key words were, "Members noted that, while incoming information over the intermeeting period had increased their confidence in the economic recovery, progress toward the Committee's dual objectives of maximum employment and price stability was disappointingly slow."

Chairman Bernanke has also said in a prior speech that it would be years before employment returned to more normal levels. What is that level, which should give us a clue to when the Fed will cease with credit easing, and begin to raise interest rates?

Right now, the Fed is concentrating on the maximum employment mandate, since they see little sign of inflation. This is not the case with food, energy, and health costs, which have been rising fairly steadily. Historically, inflation hasn’t kicked in until the unemployment rate has dropped to the 6-7 percent, from its current 9.4 percent rate. In fact, many more are partially employed and wages are still stagnant, which means that consumers, who make up 70 percent of all spending, are without the means to spend and so cannot drive up prices.

The real news was the 103,000 additional nonfarm payroll jobs created in December—113,000 on private payrolls less the net loss of 10,000 government jobs. And prior months were revised upward, so that 1.1 million total jobs were created in 2010, and more than 7 million remain unemployed, as we said last week.


Wage inflation remains anemic, however.  Average hourly earnings in December edged up 0.1 percent, following no change the previous month.  On a year-ago basis, average hourly earnings growth slowed to 1.9 percent from 2.1 percent in November, suggesting little wage pressure on inflation.

Turning to the household survey, the unemployment rate unexpectedly fell to 9.4 percent from 9.8 percent in November.  Analysts had called for 9.7 percent.  The rate declined in part due to a notable drop in the labor force, suggesting the unemployment rate will rebound when discouraged workers return.


More crucial are the percentage of unemployed and “marginally attached”—i.e., parttimers. The expanded rate of underemployment—the so-called “U-6” alternative measure—slipped to 16.7 percent from 17.0 percent in November but has remained very high throughout 2010.  This measure adds in part-time workers for economic reasons, discouraged workers, plus those not looking for work but would take a job if offered one.  Finally, the median duration of being unemployed continued to creep higher at 22.4 weeks from 21.7 weeks in November.  The long-term unemployed are going to have a more difficult time finding new work as job skills deteriorate or do not keep up with employer needs.

There was some hope in the Labor Department’s Job Openings and Labor Turnover Survey (JOLTS). There were 3.2 million job openings on the last business day of November, the U.S. Bureau of Labor Statistics reported today. The job openings rate was essentially unchanged over the month at 2.4 percent.


In November, about 4.118 million people lost (or left) their jobs, and 4.210 million were hired (this is the labor turnover in the economy) adding 92 thousand total jobs. Even with the slight decline in November, job openings are up significantly over the last year.

The bottom line seems to be that price stability is a moving target, and one that is difficult to define. But the Fed seems fixated on improving the jobs picture first, and worrying about excessive prices later.

Harlan Green © 2011

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