Home > Uncategorized > Era of ‘jobs-targeting’ begins as Fed launches QE3 – Telegraph

Era of ‘jobs-targeting’ begins as Fed launches QE3 – Telegraph

September 16, 2012 Leave a comment Go to comments

The Fed has switched to targeting jobs – not prices – sure that the headwinds of debt-deleveraging will check inflation. This is a contentious point. Minneapolis chief Narayana Kocherlakota says lack of jobs skills imply less slack than assumed – known as an upward shift in the “Beveridge Curve”. The problem is “structural”.

“Our country’s current labour market is much closer to ‘maximum employment’ than the post-Second World War data alone would suggest. Unemployment may not have too much farther to fall before inflation threatens,” he said.

Yet something is deeply wrong. The percentage of long-term unemployed has surged to 40pc, double previous recessions. The labour participation rate has fallen to a 30-year low of 63.5pc.

Headline unemployment is 8.1pc – viz 11.3pc in Euroland – but this does not count millions who have dropped out of the system. For the doves this screams “cyclical”, caused by lack of demand. “The loss to the economy is enormous,” said Nobel economist Peter Diamond. “If you leave school and can’t get a job, it hurts for years. You lose earnings for a decade.”

The arch-critics of QE have changed their tune. At first they said it would set off galloping inflation. This has not happened, though it may at some point if money velocity picks up and ignites the monetary base. They now say QE1 and QE2 failed because the economy has not fully recovered. The claim exasperates monetarists. America’s output is now well above its previous peak in late 2007, unlike Japan and most of Europe.

“QE has made a massive difference,” said Tim Congdon from International Monetary Research. “If they had not done it we would have gone into another Great Depression.”

Lars Christensen from Danske Bank said the real criticism of the Fed is that QE has been conducted badly, without any clear rules. “Nobody knows what they are trying to achieve. It would be much better if he had a transparent target of 5pc trend growth for nominal GDP. Bernanke has been engaged in credit policy, not monetary policy. He has given QE a bad name. That is the real indictment,” he said.

via Era of ‘jobs-targeting’ begins as Fed launches QE3 – Telegraph.

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