The Fed Finally Does Something About Unemployment. And It’s Big.

After three years of doing a wonderful job of maintaining stable prices while doing a terrible job of maximizing employment, the Fed finally seems determined to take its dual mandate seriously.

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Jonathan Ernst / Reuters

Federal Reserve Chairman Ben Bernanke delivers remarks about a significant shift in the direction of U.S. monetary policy at the Federal Reserve in Washington, Sept. 13, 2012.

Wow. I’ve been a broken record about America’s stay-the-course monetary policy, about the Fed failing to fulfill its mandate to maximize employment at a time of rampant joblessness,  about Ben Bernanke channeling Jerry Seinfeld and basically doing nothing while Congress was doing less than nothing.  Well, Bernanke and the Fed did something Wednesday. They did something big.

The technical details are pretty dull. The Fed announced that it intends to keep its key interest rate at zero until unemployment drops to 6.5%, the first time it’s ever set a target for employment. It also signaled that it will tolerate inflation as high as 2.5%, above its stated goal of 2%. And it extended its “QE3” bond-buying program to hold down long-term interest rates. What it means is that Bernanke and his fellow inflation doves have won their argument with the hawks, and the Fed is stepping on the accelerator instead of riding the brakes. After three years of doing a wonderful job of maintaining stable prices while doing a terrible job of maximizing employment, the Fed finally seems determined to take its dual mandate seriously. As Bernanke admitted in his press conference, the Fed has consistently overestimated the pace of growth since the recovery began in 2009.

The hawks who already describe Bernanke as Helicopter Ben and Zimbabwe Ben are sure to screech that the new targets will produce hyperinflation, which they always think is just around the corner. But as I’ve written, a little inflation can be good for economic growth, encouraging families and businesses to spend and invest rather than hoard their cash. And persistently high unemployment is a tragic waste of human capital. It ruins lives. It hurts kids. It’s the enemy.

In an ideal world, Congress would try to do something about it with fiscal policy. But after Republicans reclaimed the House in November 2010, the Capitol Hill conversation turned to austerity. President Obama refused to accept GOP austerity demands, so the U.S. hasn’t followed Great Britain back into recession. But Republicans have refused to accept Obama’s push for more fiscal stimulus, and the recovery has remained weak. The so-called fiscal cliff, with over $500 billion in tax hikes and spending cuts due to kick in January 1, could impose even more pain if Congress cannot work out a deal to avoid it; Obama has proposed some additional short-term fiscal stimulus, like extending unemployment benefits and payroll tax cuts, but Republicans have been allergic to stimulus since he took office.

It would have been nice if Bernanke had picked up the slack sooner. Maybe he feared the political consequences of juicing the economy before the election; Governor Rick Perry had warned that “we would treat him pretty ugly down in Texas” if he tried another round of monetary stimulus. Maybe some of his hawkish colleagues who had been fighting for tighter policies came around to his side after their predictions stubbornly failed to come true; to his credit, Narayana Kocherlakota of the Minneapolis Fed changed his views after seeing more data.  Maybe Bernanke just figured that enough was enough, that it shouldn’t require a global economic meltdown to get the Fed to do creative things, that it was time to re-adopt the whatever-it-takes attitude that made him Person of the Year in 2009.

There will be more to say about what these new targets mean for the Fed. But for now, they should help the economy—or at least prevent cliff-diving politicians from harming the economy as much as they might like.

(PHOTOSThe Recession in Pictures: America Copes with a Stagnant Economy)

96 comments
EdChampagne
EdChampagne

Rate go up when people don't want to buy the bills, supply and demand. The FED RATE is set based on many factors, mainly on T bill , LIBOR, GDP, war, ect.,

Sibir_Russia
Sibir_Russia

On November 4 2008 Barack Obama  victory in presidential race November 4, 2008 United States national debt was  10,566,146,196,490.58 $  

Now the national debt of the USA consist of 16.3 trillion.

http://usdebtclock.org/

By 2016, it will exceed 22 trillion, while the total world GDP of about 60-70 trillion. The national debt of the USA is growing in geometrical progression, and seeks to overtake the world's GDP.

This is a great corruption.

http://demonocracy.info/infographics/usa/world_debt/world_debt.html

http://www.youtube.com/watch?v=iTBODoBaCns&feature=player_embedded

thebrownrebel
thebrownrebel

A great piece regarding Bernanke and the Fed.

AkkierZeveruz
AkkierZeveruz

 When are we going DEVELOPING, if we do not know ourselves, who we really are

PeteMcNesbitt
PeteMcNesbitt

Raise wages, lower hours, hire more people, let taxes go back up, shake stir and wait for the howling to begin.

CindiRose
CindiRose

Ok, I'm gonna sound really stupid but what does this all mean for unemployment extensions for 2013??  My husband only can collect until Dec. 29th.  We don't know what were gonna do and we have a child to take care of.

superlogi
superlogi

It's not only an expansion of the FED's authority, it's a measure of the Chairman's hubris and certain to emasculate the value of our currency.

EdChampagne
EdChampagne

There's no shortage work, just a shortage of leadership. Health Care can never be good enough, never in history has a country failed for being to educated. Infrastructure, housing, R&D, technology.

Problem is physiology, people who have it good, maybe to good, fear change will be at there expense, But most likely, they will be looked too to lead change that will help there child, grandchildren and Country to a better life. Look at the Great-depression Germany recovered from a worse depression lead by a mad man. US built the parks, TVA, BPD, Roads and US Airmail, for without there would have been no airplane manufacturers thus think about WW-II. 

WHERE JUST DUMB   

Caoimhin
Caoimhin

"And persistently high unemployment is a tragic waste of human capital. It ruins lives. It hurts kids. It’s the enemy."

Er, a bigger enemy is compound interest. A bigger enemy is people who work and save to provide for their future and Keynesians insist on robbing them further by reducing the purchasing power of every dollar.  A bigger enemy is economists whose expertise consists mainly of explaining tomorrow why what they predicted yesterday didn't happen today.

And the biggest crime of all is the failed policies of the Fed are never seen as such by the religious dogmatists of the "debt is good" school of thinking.

One hopes you at least will revisit your analyses in 6-12 months when it should be clear to even Paul Krugman that debt-financed "demand" isn't the wisest course.

PaulDirks
PaulDirks

Real inflation was what propelled Reagan into office. We've seen nothing like it since but the chicken-littles only know one song.

dlastor
dlastor

It's difficult to tell if the author is serious or if this is a parody piece ?  "After three years of doing a wonderful job of maintaining stable prices", perhaps you live in a bubble, or were just too lazy for due diligence.  I suggest you direct yourself over to FRED (Federal Reserve Economic Data)  be it arrogance or ignorance, the FED posts the data for all to consume.  Hand pick some items you buy on a typical trip to the grocery , plot the price increase.  Then convert that into buying power by normalizing to the rapidly debased dollar.  Inflation is here, even the cooked headline number has CPI at +2.2% YoY.

Further, buying longer dated bonds is nothing new for the fed.  It did not impact unemployment for QE1 when the fed bought back 600B in bad mortgages with your tax dollars, didn't work in for QE2 when the fed printed up more currency to buy 600B of long term bonds, didn't work for QE3 when the fed announced it would buy 40B in MBS into perpetuity, QE4 when the fed printed up more currency to buy 85B of a mix of MBS and longer dated bonds.  But this new QE5...that's the one that's going to work ? "Finally they did something"  are you kidding !?? be responsible.  Monetization of debt into perpetuity with the tax payers holding the bill sounds like a good idea ?  Think we're in a recovery? normalize any broad market index to the debased dollar ?  look grim?  it should.  This is the result, not opinion but fact.

Employers need to forecast growth and earnings, it's their fiduciary responsibility to the shareholders.  Couple this fact with the ever changing policies from washington; a crystal ball becomes clearer than statisticians and economists.  Policy instability yields uncertainty, uncertainty means employers must control what they can - costs/headcount.  Most have learned to live lean, and the FRED numbers show corporations are getting much more out of their employees than before with rising productivity (the real fed mandate) , decreased headcount, and less household income than ever before.  Why hire ?

lolly53
lolly53

B.A.N.A.N.A republic money, see also:

 "Dollar falls against euro, pound after Federal Reserve offers detail on low rates" from the Washington Post.

QE = Quickly Eating up the savers in favor of the  Profligate Politicians.

Profligate

jmac
jmac

The election's over and the Fed finally acts.  Not that anyone's afraid of politics.  

DrinkerOfTheRye
DrinkerOfTheRye

@PeteMcNesbitt No, the real answer is to print and borrow more money, providing that to the banks and the Government. That's the policy for success.

MrObvious
MrObvious

@CindiRose 

Unfortunately not. That's not really their function anyways. You're going to have to reach out to your congress critters about that.

JeanneValjeanne
JeanneValjeanne

@CindiRose I am also set to exhaust benefits on Dec. 29----In effect, what it means is that we will no longer be receiving any kind of unemployment assistance, federal or state. Also, we will not be counted as part of the published "unemployment" statistic because only those on unemployment benefits are counted. We'll be invisible to the government but increasingly visible to soup kitchens, food pantries, and shelters around the country. There are over 2 million of us out here!

samtehman
samtehman

This has nothing to do with extending unemployment benefits unfortunately. I don't know if they are talking about extending benefits in Congress or not but I believe it is part of the 'fiscal cliff' debate.

gysgt213
gysgt213

@superlogi Just by some gold off the Fox News and right wing radio folks.  You will be fine.

ConorFinlay
ConorFinlay

@Caoimhin 

Well why don't you come to Europe! (considering your Irish name you might already be there) We've been hit by a huge reduction in our spending power, despite an initial reduction in inflammtion, rents, petrol etc have continued their upward spiral. Our benefits have been cut, HUGE tax increases at rates that make my American friends,go mute when complaining. But you know what, if you have a job, your going to be OK,maybe your wages have stagnated but you'll still pay for food and rent at the end of the month. 

But the people I know without a job? That's a tragedy. I have seen upwards of 33% of my peers emigrate with no options in an  austerity addicted country.

superlogi
superlogi

@PaulDirks And what fixed it Dirks?  It was a FED Chairman tightening the screws on credit, one I might add who was one of Barry Obama's chief economic advisors.  Austerity works and the fact is, given borrowing and spending this country and Europe of done in the past, is inevitable.

zeustiak
zeustiak

@dlastor The debt bubble burst.  The only way to get out from under the debt burden is to write it off or inflate it away.  Controlled inflation is the way to go.  

bobell
bobell

@lolly53 When the value of the dollar drops, exports increase. There's always a silver lining somewhere.

EdChampagne
EdChampagne

@jmac  Don't think they should act until they give congress a chance to act. But, they don't want to wait till they fly into a building, FED should act on economics not like 2002-2008

superlogi
superlogi

@MementoMori @superlogi 

emasculateverb1 the opposition emasculated the committee's proposal: weaken, enfeeble, debilitate, erode, undermine, cripple; remove the sting from, pull the teeth out of; informal water down.2 archaic the ganders should be emasculated at three months. See castrate.

superlogi
superlogi

@ConorFinlay @Caoimhin I don't feel sorry for Ireland at all.  A generation of fiscal profligacy will result in your problems, just as it has throughout Europe.  Unfortunately, you thought you could get away with it without paying for it and now the bill is coming due.

PaulDirks
PaulDirks

@JohnDavidDeatherage @PaulDirks Yes, I'm aware of that. The fact that it hasn't risen to such levels since and is therefore NOT the most dangerous economic problem we face is precisely my point.

JohnDavidDeatherage
JohnDavidDeatherage

@zeustiak @dlastor Inflation is a tax on everyone.  I think we will devalue the dollar and repay the national debt with a debased currency. Our creditors are not stupid people. They will see this as well.  They will demand higher interest rates to compensate them for the added risk..  So when the economy recovers, I expect interest rates to rise beyond the expected....

EdChampagne
EdChampagne

@bobell @lolly53  Think you got dyslexia, when the dollar drops, other money goes further in the US, so people come and spend money here, even jobs overseas move back to the US. That is why when Greenspan allow W Bush to run up the credit card without raising rates, the take was in, and hard times on there way. BUT the people wanted something for nothing and they checked out and stusk us with the bill.

Caoimhin
Caoimhin

@bobell @lolly53  

If you have stuff to export, and if other people have money to spend, and if they prefer what you make to what they make in Korea or Germany...

Caoimhin
Caoimhin

@JohnDavidDeatherage @jmac 

The Federal Reserve Act is unconstitutional on its face, notwithstanding nearly 100 years of private central banking issuing fiat currency to the government at interest.

The Constitution is very clear on the matter, actually, irrespective of your view of private central banking.  The "issuing power" is not a power delegable by Congress anymore than the President can have his personal attorney act as Commander in Chief.

Given this - who gives a fig whether or not Bernanke is subject to political influence.

jmac
jmac

@JohnDavidDeatherage @jmac "the federal reserve is largely insulated from politics."  That got a laugh.  That's like saying the Supreme Court is largely insulated from politics.  Heck, why not just say Congress is largely insulated from politics.  

bobell
bobell

@JohnDavidDeatherage @jmac And boy, do the Republicans hate that.  Some just want to audit the FED.  Ron Paul would  kill it. If Bernanke has been totally unaffected by all the noise coming from the right, he has nerves of steel.

Chosun1
Chosun1

"largely" is not the same as "totally"....  just like the supposedly apolotical federal appeals courts, the Fed also pays attention to political forces.  They do have to deal with, and ultimately get their jobs and mandates from, the political branches of the government.

superlogi
superlogi

@MrObvious @superlogi @PaulDirks @PaulDirks You mean cutting credit availability instead promoting it isn't austere? Are you purposely obtuse or just playing the buffoon?  With regard to deficits, Reagan exacted promises from Democrats in place of increasing payroll taxes among others and they reneged on their promises.  Same thing happened when Bush 41 increased taxes in for a promise to cut spending.  It's a good example of trusting leftist promises.

JohnDavidDeatherage
JohnDavidDeatherage

@roknsteve Gold is driven by several factors, (1) fear of inflation (2) fear of crisis (3) electronics manuf. (4) jewelry manuf.

JohnDavidDeatherage
JohnDavidDeatherage

@PaulDirks @JohnDavidDeatherage Please cite your source because I can't find it.  "The school of empiricism holds that the current rate of deficit spending and the current rates of interest are NOT driving excessive inflation."  Who said that besides you?

roknsteve
roknsteve

In case you're still living in a cave, the price of Gold has been dropping for a month.

PaulDirks
PaulDirks

@JohnDavidDeatherage @PaulDirks The school of empiricism holds that the current rate of deficit spending and the current rates of interest are NOT driving excessive inflation. That suggests that you are severely overstating the danger. 

JohnDavidDeatherage
JohnDavidDeatherage

@PaulDirks @JohnDavidDeatherage You've been reading about the threat of inflation for 30 years?  I think the problem is your choice of reading materials.

What school of economic though says that you can dramatically increase your money supply without inflation as a result?

PaulDirks
PaulDirks

@JohnDavidDeatherage @PaulDirks Inflation will soon be a very real threat.

Precisely what I mean about only knowing one song. I've been hearing about the imminent threat of inflation for over 30 years now. I'm still waiting. In the meantime unemployment is causing REAL suffering, not the imaginary kind. Guess which I think is more important?

JohnDavidDeatherage
JohnDavidDeatherage

@PaulDirks @JohnDavidDeatherage If that was your point, you should strive to make your thoughts more clear.

Because of Quantitative Easing (1, 2, 3, 4....?) Inflation will soon be a very real threat. To tame inflation, interest rates must rise.  The interest on the National Debt is barely manageable with interest rates at or near historic lows.  It will become unmanageable under higher rates. 

AfGuy
AfGuy

"Justices of the Supreme Court are given life tenure precisely to keep them out of thepolitical arena."

Yeah, how well's THAT working out now...? See Florida 2000 and Scalia, Anthony. Not an overtly political act or opinion to be seen there... nope.

jmac
jmac

@JohnDavidDeatherage @jmac  Read much? Read anything? Anyone following the Court knows it's political. Just ask Scalia as he quotes fights in Congress that never made it in the heathcare bill. He lives and breaths politics. So too Clarence Thomas, who reads nothing unless his wife reads him an article from the Washington Times.   Check out today's NY Time's editorial.  Read - it does a body good.

bobell
bobell

The point is that they have no political need to cater to any particular constituency.  They certainly have  reasons, but politics isn't one of them.  And yes, what they do has political consequences, sometimes -- as, for example, with Roe v. Wade and Bush v. Gore and Citizens United -- massive political consequences. But the need for votes does not enter into the calculation.

Mr. Dooley was right -- the Supreme Court does follow the election returns -- but not because they themselves have a direct stake in them.

DonQuixotic
DonQuixotic

@JohnDavidDeatherage @Chosun1 

If you don't think Judges on the Supreme Court hold political sway, that they don't carry their own political hang-ups or subject themselves to outside influences (like Justice Thomas' wife), then I have a bridge I'd like to sell to you.

JohnDavidDeatherage
JohnDavidDeatherage

@Chosun1 Your knowledge of our system of government is lacking.  What are the 3 branches of the federal government? 

Executive:  The President is ELECTED for 4 year terms for a maximum of two. Very political

Legislative:  House of Representatives and Senate

The entire house is re-elected every two years. There are no term limits.  Senators serve 6 year terms with no term limits.  Every two years, 1/3 of the senate is up for re-election.  This is by design.  The passion of the voting public could replace every Congress person in a single election,  the Senate is protected from the public; i.e. 1/3 can be voted out in any election. 2/3 are protected from politics.

Judicial.  Federal Judges and Supreme Court Justices are given life appointments to protect them from being influenced by politics and the public.

JohnDavidDeatherage
JohnDavidDeatherage

@jmac @JohnDavidDeatherage  Justices of the Supreme Court are given life tenure precisely to keep them out of the political arena.  The board of Governors of the Fed are appointed for 14 year terms to keep them out of the political entanglements.  The entire body of Congress is elected every two years which makes them the most political of Federal officials.  Google much? 

Chosun1
Chosun1

By "they", I mean the courts, the Fed, and just about any other institution created by, or part of, the government, that is involved in creating or implementing public policy.

Chosun1
Chosun1

Yes, they are all involved in the distribution of power and rely on political power.  They are inherently political.