Why is the economy still falling short on the Fed’s dual mandate?
On reducing the unemployment rate
Sandra Pianalto said, “On the employment front, the economy has generated 180,000 net jobs per month over the past year. That is a respectable number and it is helping to reduce the unemployment rate.”
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Before the recession (2000-2007 period), an average civilian employment to population ratio in the U.S. was 62.5%, meaning that more than 62% of the U.S. population was a part of the workforce. The ratio doesn’t include students in the calculation. Layoffs were reasonably low, while unemployment was at an average of 4%-5% range. The total number of job openings was at an average of 4,000 levels and number of Americans looking for job was around the same level.
What is extraordinary about today’s economy is that with higher number of job seekers than openings and relatively low civilian employment to population ratio at an average of 58%, “unemployment at 6.7% remains still elevated.”
Other things being constant, higher unemployment rates negatively impact consumer spending levels, which in turn puts downward pressure on the corporate earnings and valuations as demand for goods and services declines. However, lower consumer spending also leads the Fed to lower interest rates to promote higher liquidity and spending across the nation. Lower interest rates in turn favor the bond market (BND), as bond prices go up with decline in the interest rates and vice versa. A more profound economic impact of consumer spending levels can be understood by tracking the retail indices including the SPDR S&P Retail ETF (XRT) and VanEck Vectors Retail ETF (RTH), with top holdings in Zale Corporation (ZLC) and Amazon.com, Inc. (AMZN).
Unemployment still elevated
Though, unemployment is still above the feds threshold of 6%, it has “dramatically fallen from around 8% at the start of the current QE (commonly referred as tapering) program started in September 2012 to 6.7 % today,” said Pianatlo. She said, “There are too many people who can find only part-time work even though they would rather work full-time, while others have simply given up looking for work.” “And there are still-very-large number of people that have been unemployed for long durations remain a significant concern.”
Lower unemployment supports tapering.
In light of the improving labor market compared to 2009, when the unemployment rate was nearly at 10%, the committee decided at March 18-19 FOMC meeting to make another reduction in the pace of its asset purchases. This will be the third consecutive reduction since December of last year. Pianalto added, “We have now trimmed our purchases to $55 billion of Treasury and mortgage-backed securities each month.”