ECONOMIC INDICATORS

Unemployed burn as Fed fiddles on natural rate debate

BLOOMBERG FILE PHOTO/BRENDAN SMIALOWSKI
THE U.S. FEDERALl Reserve building stands in Washington, D.C., U.S., on Saturday, Dec. 31, 2011.
Posted 5/23/12

WASHINGTON - Federal Reserve officials and economic advisers are debating far-reaching differences on whether to accept a jobless rate that doesn’t fall much below 6.5 percent or act more aggressively to reduce it to 5 percent or less.

David Horowitz says he’s “not enough of an economist” to know who’s right. He just wants a full-time job again.

Horowitz, 47, says he lost his health policy analyst job in Washington a month before the U.S. recession began in December 2007. He has met his expenses with temporary jobs in his field and work as a swim teacher, along with loans and savings.

As for the policy makers’ debate on joblessness, “if they’re declaring that it’s a permanent situation, then that does make me angry,” he said. An approach that doesn’t put job creation first “puts a lot of people out of work and makes our educations worthless, and doesn’t give much optimism about working hard and moving up.”

Horowitz and millions of other unemployed and underemployed people are searching for jobs at the same time policy makers, such as San Francisco Fed President John Williams, and economists, including former Obama administration adviser Jared Bernstein, ponder whether the current 8.1 unemployment rate will ever drop to the 5 percent level where it stood when the longest and deepest recession since the Great Depression began.

Cyclical, structural

The debate centers on whether the jobless rate is high because of a lagging economic recovery, which can be influenced by monetary policy, or because changes in the labor market and extended unemployment have left many workers lacking necessary skills, a structural problem that the Fed can’t affect.

The central bank lowered its benchmark interest rate to near zero in December 2008 and has said economic conditions warrant keeping it there through late 2014. The Fed has expanded its balance sheet by $2.3 trillion through two rounds of large- scale asset purchases.

The balance sheet reached a record $2.94 trillion in February.

In September, the central bank announced it would sell $400 billion of short-term securities and buy $400 billion in longer- term securities, to further lower borrowing costs and support the economic recovery. The program, known as Operation Twist, is scheduled to be completed in June.

Chicago Fed President Charles Evans has argued that the high level of unemployment warrants additional asset purchases and said the Fed should tolerate a higher rate of inflation as it takes more aggressive action to bolster growth.

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