Yellen explains how the Fed uses monetary policy to create jobs


Apr. 2 2014, Published 4:05 p.m. ET

Job creation

Along with community-initiated organization sponsor programs, Yellen believes two other important things help people find a job in a challenging economy.

We can assess the condition of the job market in the U.S. through the Job Openings and Labor Turnover Survey (or JOLTS) issued by the Bureau of Labor Statistics (or BLS). The report includes monthly estimates of job openings, hires, quits, layoffs and discharges, and other separations. The headline number, job openings, as you can see in the chart above, shows the economy has yet to recover on the jobs front from the its abyss of the 2009 crisis.

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Yellen mentioned that the most important thing the Fed does is use monetary policy to promote a stronger economy. The performances of popular exchange-traded funds (or ETFs) like the SPDR S&P 500 ETF (SPY), the iShares Core S&P 500 ETF (IVV), and the iShares S&P 100 ETF (OEF), which track large-cap equities of companies like Apple Inc. (AAPL) and Exxon Mobil Corp. (XOM), are a good barometer to judge whether the Fed’s policies are having the desired effect in the economy. These ETFs generally do well if the economy is strengthening.

Yellen believes the Federal Reserve has taken extraordinary steps since the onset of the financial crisis to spur economic activity and create jobs. At the same time, she agreed that such efforts are still needed.

So, Yellen suggested two crucial things that would help the economy to recover from its job abyss.

  1. Job creation
  2. Jobseekers’ courage and determination

Job creation

It’s a cause-and-effect relationship, a spiral that starts with the Fed lowering the interest rate and ends with job creation and economic recovery.

Yellen explains that the Fed helps create jobs by influencing interest rates. By keeping interest rates low, the Fed tries to make homes more affordable and revive the housing market. Simultaneously, low interest rates also make it cheaper for businesses to build, expand, and hire. In effect, the Fed tries to lower the costs of buying a car that can carry a worker to a new job and kids to school, at the same time spurring the revival of the auto industry. By lowering the interest rate, the Fed intends to help families afford things they need so that greater spending can drive job creation and even more spending, thereby strengthening the recovery.

Courage and determination

Yellen agreed that the past six years have been difficult for many Americans. The hardships caused by the Great Recession of 2009 have shattered lives and families. While elaborating on the nature of the hardships, Yellen said: “Too many people know first-hand how devastating it is to lose a job at which you had succeeded and be unable to find another; to run through your savings and even lose your home, as months and sometimes years pass trying to find work; to feel your marriage and other relationships strained and broken by financial difficulties.”

To motivate people to find the courage and will to keep trying, she mentioned the stories of three individuals in Chicago who have benefited from help extended from community groups. Read on to the next part of this series to find out how Dorine, Jermaine, and Vicki fought unemployment.


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