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Beyond that, I wouldn't be surprised if the Fed under Yellen lowers the unemployment-rate threshold that could trigger an increase in interest rates. A number of years ago, the Fed introduced this idea of a 6.5% unemployment threshold for considering rate hikes. But that threshold is almost certainly out of date. That's because the unemployment rate continues to drop for the wrong reasons: We keep getting a decline in the number of people looking for work. The Fed wants strong job growth, not people abandoning the labor force. And so it has to decide whether to throw it away or go to lower the level. Our feeling is the Fed will lower it to 6% or perhaps 5.5%.
And how long would we expect that unemployment rate to stay at 5.5%?
The following chart shows the 30 year moving average of the unemployment rate.
Click to enlarge.
Note that 5.5% seems like a pipe dream over the long-term (unless we can somehow magically undo the permanent damage done in the 1970s).
Yellen love you long time.
(Shame on me for going there, lol. Sigh.)
Source Data:
St. Louis Fed: Unemployment Rate
7 comments:
I doubt the Fed (or BoE) will emphasize a new target. The old target was really just political cover for the policy they wanted to implement.
If UE drops to 6% (or less) for a brief period of time it's going to force the Fed to 1) abandon ZIRP/QE or 2) acknowledge the UE3 isn't really an important measure of the economy.
The Fed is in a tough place because nearly all economic indicators they would point at for political cover (UE, bond spreads, stock market, housing prices, etc.) are all relatively healthy (if not bubble territory).
Nathan,
I hear you.
For what it is worth, my favorite healthy economic indicator is that we don't have an inverted yield curve (often an indication of impending doom).
Of course, pegging the short-term yields to 0% with ZIRP has a LOT to do with that!
So is the situation really healthy? Or is it like painting a smiley face over the heart rate monitor in an intensive care unit? What you can't see, can't hurt you! ;)
If the stock market continues to struggle in 2014, it will call into question the sustainability of this virtuous prosperity cycle (and just how omnipotent the Fed really isn't). I've been questioning it since 2004. Over the long-term, I don't think the Fed can create all that much real prosperity (if any).
I agree. AFAICT QE/ZIRP is analogous to free drinks in the casino - it encourages more people to play the game but doesn't change the expected value of the outcome.
I think the real problem is that the Fed is operating with the concept of prosperity. In particular, it strikes me as odd that many things that are positive for GDP growth are neutral to negative for individual happiness. For example, there are a lot of two income households where the lesser income is basically breakeven after considering additional costs (e.g. day care, transportation, etc.) and marginal tax rates, nevermind the additional stress. It seems rather perverse for the government to prefer more jobs of that sort.
In general, it seems like GDP is just a measure of how financialized a society has become, how many transactions happen outside the household, and how much economic activity is subject to taxation. Nation states have a reason to care about GDP, but individuals don't.
Nathan,
In particular, it strikes me as odd that many things that are positive for GDP growth are neutral to negative for individual happiness.
Yeah, both war and hurricanes add to GDP, as does cancer. Go figure.
For example, there are a lot of two income households where the lesser income is basically breakeven after considering additional costs...
I would add the following risk that few talk about.
In the past, if the father lost his job the mortgage was at risk. With unemployment at 10%, that's about a 10% risk.
In the present, if either the father or the mother loses a job the mortgage is at risk. With unemployment at 10%, that's about a 19% risk (0.9 x 0.9 = 0.81, the chance of neither being unemployed).
And some wonder why the housing bust was so severe! Rather than having two incomes and treating the second as a safety buffer, the incomes were combined to buy a bigger house. Instead of reducing stress and risk by having two people work, stress and risk were increased!
Haven't they already shifted the goalposts? I thought ZIRP was going to end when UE looked better, and now they've transferred the better UE to be a trigger on how they handle QE.
Quantitative Easing is too beaucoup.
Charles Kiting,
Let's just shift all the goal posts to the 50-yard line and call it good! ;)
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