The Infallible Fed At Verge Of (Not) Admitting Failure

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“Labor market conditions are affected by a wide variety of factors outside a central bank’s control,” admitted Richmond Fed President Jeffrey Lacker a few hours after the employment report bounced around the world. Yet for years, the Fed has proclaimed that the heroic motivation for its selfless money-printing mania (QE) and bold zero-interest-rate policies (ZIRP) was the deep desire to improve the unemployment fiasco for average Americans.

So the employment report was mixed in the manner befitting these crazy times: 165,000 jobs were “created” in April. March was revised up from a super-lousy 88,000 to a still lousy 138,000; February was revised up from 268,000 to 332,000. The unemployment rate dropped to 7.5%, from 7.6%, the lowest since 2008 – and so we’re excited and go into the weekend celebrating.

Stock markets certainly did. The Dow and the S&P 500 hit all-time highs. Exuberance about the report skittered around the world and propelled the German DAX to an all-time high as well. There’s nothing like a “better-than expected” though very lousy headline number to amplify the power of the money-printing machines.

But there were some big fat flies in the ointment. Hours worked dropped to 34.4 from 34.6 in March, the worst so far this year. And average weekly incomes declined – the bane of economic growth. That persistent trend has hollowed out the middle class and impoverished the lower classes. Falling real incomes is a serious long-term problem in the US.

Then there is the difference between those considered “unemployed” and those who just don’t have a job. Despite the lower unemployment rate, an ever greater number of people don’t have jobs! That ugly phenomenon shows up in the Labor Force Participation Rate (people over 16 who either have a job or are looking for one, as a percent of the total labor force). It peaked in 2000 at over 67%, then drifted lower and crashed during the Financial Crisis. It continues to decline with surprising stubbornness. In March, it hit a record low of 63.3%, and in April, it remained stuck there.

“Workers are discouraged by adverse labor market conditions,” Richmond Fed President Lacker said. It was an “obvious” reason. He also saw some demographic developments at either end of the age spectrum. Young people, for example, might have “difficulty finding desirable entry-level jobs, a by-product of weak economic growth,” he said. But even the participation rate for the prime working-age population has declined sharply! Lacker attributed this to “weak economic activity” and possibly “other secular trends.”

The broadest and perhaps most accurate measure of reality that the Bureau of Labor Statistics offers is the Employment-Population ratio (working people as a percent of the total working-age population). It ticked up one micron to 58.6, still mired near the bottom of its range since the Financial Crisis – lows last seen in the early 1980s. The ratio had peaked in April 2000 at 64.7%! Those were the days of “full employment” – the days before QE and ZIRP had any meaning beyond Japan.

The Fed’s money-printing mania started in December 2008, when the Employment-Population Ratio was 61.0%. The ratio documents the enormous success of the Fed’s policies with regards to the job market! Alas, QE was never designed to create jobs, and it can’t. As Lacker admitted, the labor market is “outside a central bank’s control.” What QE and ZIRP did create were bubbles in the credit markets, stock markets, farmland, commodities, even in pockets of the housing market. Jobs? Not so much.

Both, the Labor Force Participation Rate and the Employment-Population Ratio, indicate that quite a few jobs have been created since 2009, but those jobs have barely kept up with the growth of the working-age population. Companies are hiring, but not fast enough. The economy is growing, but barely. Yet interest rates have been near zero – or below zero when inflation is taken into account – for years, and the Fed’s balance sheet has quadrupled since 2007.

“In this situation, the benefit-cost trade-off associated with further monetary stimulus does not look promising,” Lacker groused. “The Fed seems to be unable to improve real growth.”

Preemptively, the Fed has started blaming Congress. That’s more convenient for an infallible institution than admitting that its policies have failed to resolve – because they were never intended to resolve – the employment fiasco. In its minutes from the March 19-20 meeting, participants relentlessly plowed into Congress’s fiscal policy that might be “tightening,” and they pointed repeatedly at “fiscal restraint” and other deadly sins – despite the trillion dollar deficit. They’re paving the way for the moment when even officially it is clear that the pretext for handing out trillions was just a pretext.

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