Yellen's Unemployment Focus

"We know we're not close to full employment, not close to an employment level consistent with our mandate, and unless inflation were a significant concern, we wouldn't dream of raising the federal funds rate target." - Janet Yellen Federal Reserve Chair

The quote above is from Janet Yellen's first Federal open Market Committee and I have to say that it is refreshing that at least she is speaking in relatively easy to understand sentences. Remember Alan Greenspan?  One of my favorite quotes from him was, "I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said."  He was the master of disguising his meanings and for some reason everyone loved him mainly because the stock market went on a tear to remember.

Yellen has a different problem to Greenspan in that no matter what she says or does it will be incredibly hard to get the economy kick started and remove the Federal Reserve stimulus and the excess money printed by her predecessors without creating either a very bad recession or huge inflation.  Greenspan on the other hand was the first to print money so the impact was huge with small denominations of cash.  Bernanke took printing to an unprecedented level and after it had little impact (other than to the stock market) he handed over the reigns to Yellen to try to deal with the coming issues.  So it was interesting to listen to the new Federal Reserve Chair talk about her main concern at the present time which is unemployment.  Her belief is that interest rates should remain low until such time as unemployment picks up and she detailed the metrics that she is looking at to track improvement.  Fortunately I think she is on the right track with her employment metrics but I have little faith that her policies will have much impact.

1.  U-6 - The U-6 is a broad measure of unemployment that I have been following for years.  This measure captures the underemployed (those who would prefer a full time job but have to work part time as there are no full time positions open).  By this measure the unemployment rate is 12.6% a far worse level than the 6.7% reported by the unemployment number.

2.  Long-term unemployment - This measure looks at people out of work for 6 months or longer.  In 2010 this stood at 45% of the unemployed and has since improved to 37% but is well above the 17% pre-recession number.

3.  Labor force participation rate - This measure I have also tracked for years.  The number reflects people able to work versus the number working and in December it fell to its lowest level in 35 years.  This is terrible for growth prospects as less people working means lower GDP and economic growth prospects.

4.  Quitting and hiring - People only quit their jobs if they think that a better opportunity presents itself (being fired is a whole different story of course).  Therefore the more people that quit the better the health of the job market and thereby the economy.  Yellen also wants to look at hiring as this also shows a poor or robust economy.  So far the numbers have revealed that while the "quitting" index has improved, the number of hirings is still woefully inadequate.  To me this measure smacks of people not only being fed up with their job but also relying on social handouts rather than showing opportunity.

5.  Wage growth - Growth in wages has been anemic.  As I have discussed in earlier blogs earnings are at the equivalent of 1980 earnings (when factored against inflation) and their current growth of 2% is still not keeping up with inflation.  While the Federal Reserve has as its benchmark an inflation rate of 1.2% you and I know that this number is a very poor reflection of the true increases in our daily cost of living. 

With inflation low and unemployment anemic, the Federal Reserve has a lot of latitude in what it can do to stimulate the economy.  The question therefore is will the new Fed Chair implement policies to take the bull by the horns and unfortunately that answer is an unequivocal no!

As you can see from the unemployment metrics the economy is not on a good footing.  Employment leads to wages, wages lead to spending and spending leads to a healthy economy.  Until these measures can improve her mindset is to keep rates low as that is the key to boost economic growth.  It is interesting then that she continues to cut the amount of monthly stimulus as past Federal Chairs have looked at stimulus as the only way to engineer growth and keep interest rates in check.  Maybe she realizes the futility of these methods or maybe she is just testing the market to see how low she can go in terms of stimulus before things take a turn for the worse.  Either way she will not be able to keep rates low without artificially supporting them with more money and in all honesty as Bernanke showed, neither of these policies will stimulate employment.

So once again we have a Federal Chair that monitors the numbers but does not provide a policy that will address the underlying issues.  Until such a policy is put in place it is just a matter of time before she is forced to increase monetary stimulus in a another futile effort to grow the economy.  While she is new she should take the opportunity to implement new policies but it appears that she will continue down the same path until there is a problem. Why try to improve something until it breaks?  To me this is equivalent to standing in front of the Hoover Dam waiting for the wall to break even while you see cracks appearing so I choose to move out of the way of the coming floods.