Can monetary policy address U.S. long-term unemployment?


My latest contribution to Global Risk Insights examines whether monetary policy alone can cure the problem of chronic unemployment.  Key points include:

  • Can infer that new Fed Chair Janet Yellen will maintain current monetary policy due to continued labor market weakness, even though the unemployment rate is falling.
  • Impact of U.S. monetary policy can have negative consequences to emerging markets in Asia, Africa, and South America.
  • Questionable whether monetary policy can effectively address long-term unemployment.
  • Fiscal policy should be tailored to specifically address the needs of the low-to-medium skilled worker.

Global Risk Insights

With Janet Yellen newly confirmed as Chairman of the Federal Reserve, investors are now parsing her testimony to gain insight on the future direction of interest rates.  

One particularly interesting piece of her testimony involved the persistence of long-term unemployment and a high number of part-time workers: “These observations underscore the importance of considering more than the unemployment rate when evaluating the condition of the U.S. labor market.”

This statement is significant because previous Fed Chairman Ben Bernanke identified a threshold of 6.5% unemployment rate as a starting point for reversing bond purchases aimed at stimulating employment. Currently, the U.S. unemployment rate is very close at 6.6%, but it now looks as if the Fed is hedging its bets.

By continuing to purchase long-term bonds even if it is at a slower pace, the Fed will drive down the interest rate of the 30-year Treasury bonds. Since mortgage rates and…

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