Fed Has No Magic For Unemployment

Chairman Bernanke's suggestion that the Federal Reserve System has tools available to address extraordinarily high unemployment rates goes against basic economics, whose mechanisms are described in the web sites of the Fed's own Regional Banks, such as the Dallas Fed to pick one of many.

It isn't a matter of dissent for Philadelphia Fed President Charles Plosser to say, "I am really doubtful that monetary policy is a tool that is going to help us very much."  It's basic economic theory.

An operation to effect a twist in the yield curve won't help employment, but it will help Wall Street trading desks, bond funds, and corporate treasurers, folks who don't need more candy.  Mortgage rates are already at 4%, and housing is still on life support because only the top tier borrowers get the published rates.

Monetary policy has already created extraordinary support for mergers and acquisitions, dividend increases and share buybacks.  Witness, for example, Ecolab's strategic entry into the water and energy businesses through the acquisition of Nalco.  Ecolab's $2 billion in corporate debt refinancing is being led by a strong syndicate of banks, and in addition Ecolab announced a $1 billion share repurchase program.  Liquidity and access to credit in investment grade corporate markets is not an issue for monetary policy.

We may be soon hearing about large corporate downsizing from companies like Bank of America and Yahoo, if the latter were merged with another competitor.  None of these decisions will be affected by a manipulation of the yield curve by the Fed.  More small bank failures add a steady stream to the unemployment pool.

Unemployment in traditional economic terminology is frictional, cyclical or structural.  Following the global meltdown and the weak recovery, we have the worst of all labor market worlds.  Structural changes have been underway for many years due to China's mercantilist policies and our ceding ground on both light and intermediate manufacturing.  Cyclical forces will come into play once again if the economy falters in the fourth quarter. Finally, there is no appetite for corporations to add workers, especially with tepid sales growth and little pricing power.

A highway infrastructure program will certainly help unionized trades, which is probably a good Fall election time strategy, but it won't help the tens of thousands of people, from several generations, that are on line at job fairs, seeking employment in corporate America.