Let’s stipulate right up front: it’s silly to infer much from one month of job-creation numbers. The numbers bounce erratically, they are often revised dramatically one month later and they routinely defy the consensus forecasts by a wide margin.
Last month, forecasters were surprised and the media were elated when the Labor Department reported that job losses dwindled to just 11,000 in November — much lower than expected (and revised yesterday to a net gain of 4,000). The newly exuberant forecasters were surprised again on Friday, when the estimated job losses in December jumped back up to 85,000.
“U.S. Job Losses Dim Hopes for Quick Upswing,” declared a headline in The New York Times. I’m not sure how much hope there was for a quick upswing, but I’m even less convinced that the new job numbers change the picture all that much.
But here’s what’s interesting: the Fed’s policy under Ben Bernanke seems intentionally geared to high unemployment for the next several years.
In a fascinating recent analysis, Laurence H. Meyer of Macroeconomic Advisers tried to model the Fed’s decision-making as it carries out and eventually tries to unwind its extraordinary effort to juice up the economy. Beyond slashing the overnight Fed funds rate essentially to zero in December 2008, the Fed is holding down long-term rates by buying more than $1.4 trillion in mortgage backed securities and Treasury debt — “credit easing” in Bernanke’s parlance.
In theory, the Fed is supposed to aim for full employment and stable prices or very low inflation. But Meyer points out that the forecasts of Fed policymakers anticipate that unemployment will remain well above 9 percent through the end of 2010 and well above 8 percent through the end of 2011 — even though they expect inflation to remain very low.
Fed forecasts are not just predictions about what will happen. They also represent what Fed policymakers want to happen, because the Fed steers the economy with monetary policy.
In theory, the Fed could reduce unemployment more quickly by printing even more money, buying even more securities and driving down long-term rates even further. If you believe that “full employment” is about 5 percent, as the Fed does, unemployment would probably have to drop quite a bit from its current level of 10 percent before inflation became a threat.
So why not do it? Meyer theorizes that Bernanke & Co. believe that there are other costs to letting the Fed’s balance sheet balloon in size. We don’t know what those costs might be, but it’s not hard to imagine some of them: a huge carry trade, as foreigners borrow dollars and lend in other currencies; the risk of new asset bubbles in strange places; chaos in financial markets when it comes time for the Fed to unwind its purchases.
The reality is that this economic crisis has been so severe that it will take time to rebalance, rebuild and perhaps repent. Lest we forget, Americans have still lost a massive amount of wealth in their homes, and the average household balance sheet wasn’t pretty in the first place. Why should anyone expect consumer spending, previously our main source of growth, to rebound? Likewise, the banks still have huge loads of troubled loans on their books, which they refuse to come clean about but worry about nonetheless.
It’s tempting to wonder about what would happen if the Fed really decided to flood the country with money. Its easy to understand why Democrats are looking for new ways to prop up the economy with fiscal policy. Even if unemployment peaks at current levels and starts to edge down, each month that it remains high will seem more grueling than the month before. But my hunch is there is a limit to quick fixes, and this will require patience.