Read the text and
then write down ten questions about it. Don´t write yes/no questions)
Try overshooting
for once, please
Mar 27th 2012, 17:04 by R.A. |
WASHINGTON
YESTERDAY, Federal Reserve Chairman
Ben Bernanke gave a speech on America's labour market that has central bank
tea-leaf readers speculating over its implications for a new round of asset
purchases—QE3. Tim Duy has what seems like the most reasonable read of the present FOMC stance.
In essence,
Bernanke suggests that the recent rapid improvements in unemployment reflect
largely a reversal of out-sized deterioration experienced during the recession.
As such, we should not expect a slower pace of improvement given current growth
forecasts. Under such conditions, I believe, Bernanke would push for another
round of QE - although it stills begs the question of why he doesn't push for
more now given the existing forecasts. But he hasn't, so we can only infer that
he thinks the costs of additional easing outweigh the benefits.
He leaves open the
possibility, however, that labor markets will continue to improve at the recent
pace, in which I think QE3 is off the table.
Let me restate that. Mr Bernanke
thinks that rapid improvement in labour markets over the past three months is a
product of catch-up from previous underperformance (given observed growth in
GDP). He does not appear to think the Fed's current
policy is sufficient to generate labour market improvements as fast as what
we've seen over the past three months. If he is wrong and the economy maintains
this pace of improvement, then, as Mr Duy says, QE3 is off the table. If,
however, he is right, and the pace of improvement slows, then another round of
asset purchases is a real possibility.
Simpler still: the Fed is willing to
engineer a labour-market recovery like that observed over the past three
months, but would not be willing to engineer anything faster than that.
Keep in mind that the recovery
observed over the past three months is a decent one, but not the one we'd
expect or hope to see after a downturn as deep as the recession from 2007-2009.
Employment has been growing at roughly 750,000 jobs per quarter, at a time when
total employment is, conservatively, 7m jobs short of trend. If the economy
were able to maintain that pace, in other words, it would still be a bit short
of full employment two years from now. And of course, this rate of employment
growth was consistent with stable to falling rates of labour compensation and
inflation.
I realise I sound like a broken record, but it is remarkable the extent
to which the Fed is willing to tolerate a very long period of costly
labour-market weakness rather than tolerate any meaningful
overshooting on the inflation side. This pathological obsession with the
prevention of any meaningful overshooting is itself a
substantial constraint on recovery. Forget QE3; the Fed could have a
substantial stimulative effect on the economy merely by signaling that it would
tolerate a year or two of above-target inflation. That the Fed is nonetheless
unwilling to do this is perhaps the strongest argument of all that the present
policy target—a 2% rate of inflation—is a poor choice relative to available
alternatives.
