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Note to Fed: Money can't buy you jobs

  • By Irwin Kellner,
  • MarketWatch
  • – 08/26/2014
  • Economic Insight
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At Jackson Hole, Federal Reserve Chair Janet Yellen addressed all the problems afflicting the labor market today except one: They can't be solved by monetary policy.

Ms. Yellen went into chapter and verse in discussing why the current labor market differs from those of the past. She compared today's stats with the numbers that prevailed at the end of the Great Recession, the previous economic peak, and other times in the past.

She discussed cyclical trends in the labor force, as well as those she considers structural in nature. Her address before the assembled group was a very thorough analysis of the problems extant, but it offered not even a hint of a cure.

She focused on how demographics determine people's willingness to look for work. Yellen also noted how the shift to a service economy influenced the kinds of jobs being offered to people, such as part-time and temporary work instead of full-time permanent positions.

Now you know as well as I do that monetary policy can't change either trend. Nor for that matter can fiscal policy.

Of course, it is always possible to rev up the economy to the point where it overheats. This might create a few more jobs at the risk of generating a rise in the rate of inflation. This in turn would validate the concerns of the inflation hawks, who have been warning about inflation flaring up for some time.

Perhaps they see the endgame to Yellen's repeated statements that the doves don't. After all, she continues to opine about stronger demand for labor offsetting some of these cyclical and structural trends. My question is, where will such growth come from? Yellen had no answer other than to suggest that monetary policy will remain easy.

Actually, monetary policy is about as easy as it can get. Short-term interest rates are at record lows, while long yields are depressed as well.

Even if there was room to ease, the literature tells us that monetary policy alone is not the best, most efficient way to boost economic growth. As I have pointed out in these columns many times before, monetary policy is good at restraint, while fiscal policy is what is needed to boost growth.

There is no doubt that if the economy needs a boost, lots of liquidity and low interest rates must be present. However, as we are seeing today — a period of the easiest monetary policy in recent memory — this is not enough. Fiscal policy must do the heavy lifting via tax cuts and spending increases. Unfortunately we have the opposite today, and this is offsetting the massive monetary ease.

Thus, Yellen's talk should be regarded as a message to the president and the Congress to get their act together and loosen fiscal policy. Then and only then can she even think about hiking interest rates.

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Content for this page, unless otherwise indicated with a Fidelity pyramid logo, is published or selected by Fidelity Interactive Content Services LLC ("FICS"), a Fidelity company with main offices in New York, New York. All Web pages that are published by FICS will contain this legend. FICS was established to present users with objective news, information, data and guidance on personal finance topics drawn from a diverse collection of sources including affiliated and non-affiliated financial services publications and FICS-created content. Content selected and published by FICS drawn from affiliated Fidelity companies is labeled as such. FICS selected content is not intended to provide tax, legal, insurance or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by any Fidelity entity or any third-party. Quotes are delayed unless otherwise noted. FICS is owned by FMR LLC and is an affiliate of Fidelity Brokerage Services LLC. Terms of use for Third-Party Content and Research.
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