By MN Gordon
Crashing Unemployment
Dear Mr. Dudley, Your recent remarks in the wake of last week’s FOMC statement were notably unhelpful. In particular, your explanation that further rate hikes are needed to prevent crashing unemployment and rising inflation stunk of rotten eggs. Quite frankly, crashing unemployment is a construct that’s new to popular economic discourse, and a suspect one at that. Years ago, prior to the nirvana of globalization, the potential for wage inflation stemming from full employment was the main concern.
US unemployment rate vs. labor force participation rate. The employment situation may not be as all-around copacetic as the U3 unemployment rate seems to indicate… just a hunch.
Now that the official unemployment rate’s just 4.3 percent, and wages are still down in the dumps, it appears the Fed has fabricated a new bugaboo to rally around. What to make of it? For starters, the Fed’s unconventional monetary policy has successfully pushed the financial order completely out of the economy’s orbit. The once impossible is now commonplace.
For example, the absurdity of negative interest rates was unfathomable until very recently. But that was before years of central bank asset purchases made this a reality. Perhaps the imminent danger of crashing unemployment will give way to the impossibility of negative unemployment. Crazy things can happen, you know, especially considering the design limitations of the Bureau of Labor Statistics’ birth-death model.
Secondly, muddying up the Fed’s message with inane nonsense like crashing unemployment severely diminishes the Fed’s goal of providing transparent communication. In short, Fed communication has regressed from backassward to assbackward.
During the halcyon days of Alan Greenspan’s Goldilocks economy, for instance, the Fed regularly used jawboning as a tactic to manage inflation expectations. Through smiling teeth Greenspan would talk out of the side of his neck. He’d jawbone down inflation expectations while cutting rates.
Certainly, a lot has changed over the years. So, too, the Fed seems to have reversed its jawboning tactic. By all accounts, including your Monday remarks, the Fed is now jawboning up inflation expectations while raising rates.
William Dudley indicates how far consumer price inflation is from its ideal height…
Photo via imbc.com
Congratulations and Thank You!
History will prove this policy tactic to be a complete fiasco. But at least the Fed is consistent in one respect. The Fed has a consistent record of getting everything dead wrong. If you recall, on January 10, 2008, a full month after the onset of the Great Recession, Fed Chair Ben Bernanke stated that “The Federal Reserve is not currently forecasting a recession.”
Granted, a recession is generally identified by two successive quarters of declining GDP; so, you don’t technically know you’re in a recession until after it is underway. But, come on, what good is a forecast if it can’t discern a recession when you’re in the midst of one?
Bernanke’s quote ranks up there in sheer idiocy with Irving Fisher’s public declaration in October 1929, on the eve of the 1929 stock market crash and onset of the Great Depression, that …read more
Source:: Acting Man
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