Recently released Federal Open Market Committee (FOMC) minutes (special strategy meeting) leaves me with the impression that there is not unanimity of thought among the participants that there is significant labor market slack. In many Fed districts, labor markets appear to be tight. Anecdotal evidence collected in these districts indicates that businesses are finding that jobs are hard to fill and that many jobs go unfilled due to a lack of qualified candidates. Furthermore, we have now seen several fairly strong employment reports in a row, even despite the harsh winter, and weekly new claims for unemployment continue to flirt with the 300,000 level, where it was during the boom economy prior to the financial meltdown.
But Yellen insists that she wants to see a reduction in what she has termed as “Disadvantaged Workers,” which she has defined as the long-term unemployed and those working part-time but wanting full time jobs. This appears to be a prerequisite to move monetary policy away from its ultra easy stance.
The real debate here is whether or not such “disadvantaged workers” are structural or cyclical. If they are structural, i.e., they simply don’t have the skills needed to get today’s jobs, then monetary policy is powerless to have any impact. On the other hand, if they are cyclical, then an economy that is rapidly growing would be able to reabsorb these so-called “disadvantaged.”
If Yellen is wrong and this is a structural issue, as many economists believe, then Yellen is risking both the Fed’s credibility and the financial health of the economy. Perhaps she should look at other labor market indicators and take a broader view.
Besides targeting the labor market, the Yellen Fed also appears to be targeting housing. And certainly, the Fed is hoping that lower rates will reignite that market. Unfortunately, housing has now become dependent on cash investors, as government regulations have crippled traditional lenders. Under Sarbanes-Oxley, lenders are legally prohibited from making loans to people they know do not have the capacity to repay. Of course, the way our legal system works, if a borrower defaults, it is the deep-pocketed lender that becomes the culprit. In addition, Fannie Mae and Freddie Mac, which together account for more than 90% of today’s mortgage funding, now have 3 years to “put” loans back to originators. Most loans that default do so within such a time period. Because originators have no place else to go to sell their mortgages, they are forced to eat any loans that Fannie or Freddie put back to them. In the end, then, mortgage lenders are enforcing much higher underwriting standards than they did 10 years ago. So, a return of a robust housing market seems unlikely. Yet, the blunt tools of monetary policy appear to be aimed at something that only specific congressional or regulatory actions can accomplish.
Robert Barone (Ph.D., Economics, Georgetown University) is a Principal of Universal Value Advisors (UVA), Reno, NV, a Registered Investment Advisor. Dr. Barone is a former Director of the Federal Home Loan Bank of San Francisco, and is currently a Director of AAA Northern California, Nevada, Utah Auto Club, and the associated AAA Insurance Company where he chairs the Investment Committee. Robert is available to discuss client investment needs. Call him at (775) 284-7778.
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