Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
VR and Gaming Becomes the Metaverse - 7th Dec 21
How to Read Your Smart Meter - Economy 7, Day and Night Rate Readings SMETS2 EDF - 7th Dec 21
For Profit or for Loss: 4 Tips for Selling ASX Shares - 7th Dec 21
INTEL Bargain Teck Stocks Trading at 15.5% Discount Sale - 7th Dec 21
US Bonds Yield Curve is not currently an inflationist’s friend - 7th Dec 21
Omicron COVID Variant-Possible Strong Stock Market INDU & TRAN Rally - 7th Dec 21
The New Tech That Could Take Tesla To $2 Trillion - 7th Dec 21
S&P 500 – Is a 5% Correction Enough? - 6th Dec 21
Global Stock Markets It’s Do-Or-Die Time - 6th Dec 21
Hawks Triumph, Doves Lose, Gold Bulls Cry! - 6th Dec 21
How Stock Investors Can Cash in on President Biden’s new Climate Plan - 6th Dec 21
The Lithium Tech That Could Send The EV Boom Into Overdrive - 6th Dec 21
How Stagflation Effects Stocks - 5th Dec 21
Bitcoin FLASH CRASH! Cryptos Blood Bath as Exchanges Run Stops, An Early Christmas Present for Some? - 5th Dec 21
TESCO Pre Omicron Panic Christmas Decorations Festive Shop 2021 - 5th Dec 21
Dow Stock Market Trend Forecast Into Mid 2022 - 4th Dec 21
INVESTING LESSON - Give your Portfolio Some Breathing Space - 4th Dec 21
Don’t Get Yourself Into a Bull Trap With Gold - 4th Dec 21
GOLD HAS LOTS OF POTENTIAL DOWNSIDE - 4th Dec 21
4 Tips To Help You Take Better Care Of Your Personal Finances- 4th Dec 21
What Is A Golden Cross Pattern In Trading? - 4th Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - Part 2 - 3rd Dec 21
Stock Market Major Turning Point Taking Place - 3rd Dec 21
The Masters of the Universe and Gold - 3rd Dec 21
This simple Stock Market mindset shift could help you make millions - 3rd Dec 21
Will the Glasgow Summit (COP26) Affect Energy Prices? - 3rd Dec 21
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Bernanke's Dual Mandate Trap

Interest-Rates / US Economy Aug 20, 2012 - 07:22 AM GMT

By: EconMatters

Interest-Rates

Best Financial Markets Analysis ArticleAfter reporting an uptick of national unemployment rate of 8.3%, it is of little surprise that the Labor Dept. said on Friday that jobless rates rose in 44 U.S. states in July, with many states showing a monthly increase in more than three years.



Chart Source: Calculated Risk, August 17, 2012

Unemployment Rate To Remain Sticky

On the surface, the U.S. national unemployment rate has seemingly dropped almost a full percentage point from the high of 2011. Nevertheless, the record rate of people dropping out of labor force, and long term unemployment has become a bigger problem than ever before, suggest the real labor market is worse than the headline unemployment rate entails. Remember, people in the "Not in Labor Force" bracket (e.g., going back to school, discourage job finders quit looking, etc.) are not counted as "unemployed."

Monthly job gains have averaged 150,000 this year, close to the 150,000 to 200,000 a month of new jobs Fed Chairman Bernanke said needed to reduce the unemployment. But eventually, a significant number of people will come back in the labor force to find jobs again, coupled with the increasing difficulty for the long-term unemployed to land a job, expect the jobless rate to remain sticky for the next few years.

Fed's Dual Mandate Performance

Federal Reserve has a dual mandate to pursue price stability and maximum employment. Right now, while the annual trend in prices is trending closely to the Fed's 2% target, the headline unemployment rate is still well above the pre-recession level of around 5%. The chart below from the CFR (Council on Foreign Relations) plots actual inflation and unemployment performance relative to the two targets (CFR uses 5.6% as Fed's target for unemployment) since 2002.

As the chart shows, the sum of the deviations has declined since the peak in July 2009, but it is still well above zero (zero being a benchmark for fulfilling the dual mandate), which suggests that the Fed will continue to be accommodative. In fact, given the debt crisis and recession in the Euro Zone, and the significant slow-down in China, traders' expectation of a 3rd round of Quantitative Easing (QE3) from the Fed is probably the only thing that's holding up the equity as well as the commodity markets.

Monetary Policy & The Labor Market

Our observation is that the Fed seems to have a tendency to draw a straight line between the increase in stock market performance to the GDP growth and an improved employment. That assumption might be valid pre 2008 financial crisis. However, the deep scar from the Great Recession has left corporations running scared to "streamline" operations at an unprecedented pace that the increase in corporate profit and stock price does not necessarily translate into more investment and more hiring into the real economy any more.

Fundamentally, monetary policy by central banks has little direct impact on the labor market, which is part of the reason why almost all central banks in the world has only one explicit primary directive - price/inflation stability (although unemployment may be part of the implicit macroeconomic factors in the decision-making process.)

More importantly, QE by the central banks is meant to loosen credit lending, which in turn should stimulate the economy. But as Fed's two previous QE's have demonstrated, due to the structure of current global banking and financial system, QE has only mostly benefited banks to hoard cheap capital from the government to speculate in commodities and stocks to get better returns, rather than circulating and lending to business and consumers like banks are supposed to.

Futile Unemployment-QE Cycle

Signs of inflation are manifesting in the "non-core" items (i.e. Food and Energy) not on Fed's "watch list." With the employment situation unlikely to improve significantly in the medium term, Fed could fall into the trap of 'unemployment-QE' cycle feeling compelled to "do more" at the expense of inflation (it is essentially a bet on how much QE before rampant inflation), thus the greater good of the nation's economy.

By EconMatters

http://www.econmatters.com/

The theory of quantum mechanics and Einstein’s theory of relativity (E=mc2) have taught us that matter (yin) and energy (yang) are inter-related and interdependent. This interconnectness of all things is the essense of the concept “yin-yang”, and Einstein’s fundamental equation: matter equals energy. The same theories may be applied to equities and commodity markets.

All things within the markets and macro-economy undergo constant change and transformation, and everything is interconnected. That’s why here at Economic Forecasts & Opinions, we focus on identifying the fundamental theories of cause and effect in the markets to help you achieve a great continuum of portfolio yin-yang equilibrium.

That's why, with a team of analysts, we at EconMatters focus on identifying the fundamental theories of cause and effect in the financial markets that matters to your portfolio.

© 2012 Copyright EconMatters - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in