Policy-unemployment link bad ideaIt’s becoming increasingly clear why Federal Reserve Chairman Ben S. Bernanke should have avoided linking the central bank’s policy decisions to specific unemployment rates.
Bernanke said in June he expected the Fed would complete its bond buying when the jobless level was about round 7 percent, and policy makers have pledged since December that they won’t consider raising interest rates as long as it exceeds 6.5 percent.
With a decline in August to 7.3 percent for the wrong reason - Americans giving up on finding work - Fed officials are being forced to shift their guideposts.
The flawed measure has contributed to market confusion over the direction of monetary policy, and Fed officials are struggling with how to minimize it as a policy benchmark without damaging their credibility, according to Ethan Harris, co-head of global economics research at Bank of America in New York.
The Federal Open Market Committee’s Sept. 18 decision not to taper its $85 billion monthly bond buying surprised investors across the globe.
“Picking the jobless rate as the key growth-side indicator was a huge mistake for the Fed,” said Harris, one of the few economists to correctly predict the Fed wouldn’t taper in September. “It was supposed to be a marker that the average Joe could look at and say, ‘Ah! OK, now we’ve hit a broad-based recovery.’ Now, they’ve almost immediately abandoned it.”
The day of the decision, Bernanke downplayed the 7 percent threshold he gave in June for the end of the central bank’s quantitative easing, saying unemployment “is not necessarily a great measure” of the job market. He also suggested the 6.5 percent level for interest-rate increases may be too high.
“The committee would also take into account additional measures of labor-market conditions,” Bernanke said Sept. 18. “Thus, the first increases in short-term rates might not occur until the unemployment rate is considerably below 6.5 percent.”
The directives have misled investors and contributed to volatility in the markets, according to Bret Barker, a managing director in U.S. fixed income at Los Angeles-based TCW Group, which manages more than $128 billion.
He said the shrinking labor force was “always the problem” with measuring unemployment, yet the Fed went ahead anyway and tied its policies to the gauge.
“How credible is your forward guidance if you’re telling us to watch these numbers and then at the press conference you’re telling us to discount them?” Barker said. “The message of the Fed has been kind of muddled from the get-go since May, and I don’t think the meeting last week helped clear that up at all.”
Bernanke’s remarks earlier this year about the prospects for Fed tapering sent yields on the benchmark 10-year Treasury note as high as 2.99 percent on Sept. 5 from 1.93 percent on May 21, the day before he first outlined a possible timetable for a reduction in the asset-purchase program.
Ten-year yields have fallen since then to 2.62 percent at 5 p.m. on Sept. 27 in New York after the Fed decided against paring its stimulus, Bloomberg Bond Trader prices show.
As central bankers try to reset policy expectations, they’re playing down the importance of the unemployment figures.
Federal Reserve Bank of New York President William C. Dudley said Sept. 23 that the decline in joblessness “overstates the degree of improvement.” Other measures, such as hiring and job openings point to “much more modest” progress, he said in a speech in New York.
Unemployment fell to 7.3 percent in August from 7.4 percent in July and 7.6 percent in June as workers left the labor force and payrolls in the U.S. climbed less than forecast.
The share of working-age people in the labor force declined to 63.2 percent, the lowest participation rate since 1978, from 63.4 percent in July.
The Labor Department will release September data on Friday, Oct. 4.
Joblessness will stay at 7.3 percent, according to economists in a survey, and employers can be expected to add 180,000 people to their payrolls, up from the 169,000 added in August. Bloomberg