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The Fed’s Humphrey-Hawkins testimony and its implications for REITs (Part 4)

Fed  Unemployment ForecastEnlarge GraphBack to Part 3

The Fed’s comments on labor markets

Bernanke’s characterization of the labor market was, “The jobs situation is far from satisfactory.” That said, conditions in the labor market are improving gradually. The unemployment rate is a half a percentage point lower than it was in the months before the FOMC (Federal Open Market Committee) instituted QE III (the third stage of quantitative easing). He mentioned that non-farm payroll employment has increased by an average of 200,000 jobs per month so far this year, but that this “situation is far from satisfactory, as the unemployment rate remains well above its longer-run normal level, and rates of underemployment and long-term unemployment are still much too high.”

Bernanke discussed that if unemployment declines, it must be for the right reasons. “For example,” he said, “if a substantial part of the reductions in measured unemployment were judged to reflect cyclical declines in labor force participation rather than gains in employment, the Committee would be likely to view a decline in unemployment to 6-1/2 percent as a sufficient reason to raise its target for the federal funds rate”

Bernanke was asked whether the current rate of unemployment was cyclical or structural. “Cyclical” means that the rate is strictly a result of a weak economy and that workers would be re-hired as the economy turns around. “Structural” means that unemployment is a result of skill set mismatches, where the unemployed are unemployable, and thus is unlikely to drop even if the economy recovers. Bernanke said he believed that about 5% of the unemployment rate is structural. He noted that for all of the discussion over whether we’ve seen an uptick in structural unemployment, the Fed has yet to see any real evidence that unemployment’s any different now than it was prior to the recession. The remaining 2.5% is cyclical. This would point to a “natural” rate of unemployment in the 5% range. Again, Bernanke emphasized that 7% is a threshold, not a target, and it represents the sort of improvement he wants to see in the labor market before we start tapering quantitative easing.

Continue to Part 5

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