Thursday, July 18, 2013

The Fed Should Stop Talking to Wall Street Traders

The Fed has the famous "dual mandate."
"The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates."
Every time the markets swoon, all of the attention is focused on how, when, or if QE3 will be tapered, unwound, or continue into the indefinite future.

The important question is , "What's wrong with the labor markets?"  The Wall Street Journal recently pointed out,

"The latest unemployment report was as underwhelming as the Household Survey. The biggest gains in June came from leisure and hospitality industries, including hotels and fast-food restaurants. Of the 195,000 new payroll jobs, 75,000 were in restaurants and bars, where the average weekly paycheck is about $351, less than half the average for all other private industries. Not to mention that these positions offer fewer hours, especially in the restaurant world, which has averaged 26.1 hours per week versus 34.5 hours for all private employers.s
What's going on? The fundamentals surely reflect the feebleness of the macroeconomic recovery that began roughly four years ago, as seen in an average gross domestic product growth rate annualized over the past 15 quarters at a miserable 2%. That's the weakest GDP growth since World War II. Over a similar period in previous recessions, growth averaged 4.1%. During the fourth quarter of 2012 and the first quarter of 2013, the GDP growth rate dropped below 2%. This anemic growth is all we have to show for the greatest fiscal and monetary stimuli in 75 years, with fiscal deficits of over 10% of GDP for four consecutive years. The misery is not going to end soon."
The Fed Chairman has made passing references to the labor market and to the Fed's work.  Why not publish the Fed's research as addenda to his testimony?  Surely, their best economists have looked at the labor market and its true underlying health, as opposed to the headline numbers.  This is where the nothing has been done, because monetary policy's power is very limited, as opposed to asset markets where it can create bubbles at will.  
In fact, the labor market has been said to hold the key to downshifting on QE3 or ending it.  If that is so, why not stop all the patter about monetary policy communications and put the cards on the table.  The June FOMC forecast suggests that the unemployment rate won't hit the top end of the central tendency target range until 2015.  
We need a more content-driven discussion of labor markets by the Fed as opposed to political apologists.  Americans beyond Wall Street trading desks would surely like to know what our sharpest economic minds think about our working futures. 

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