Thursday, September 13, 2012

Evans-Pritchard: "Era of 'jobs-targeting' begins as Fed launches QE3"

When he puts it like that it makes you wonder "What if the cost of money isn't the problem with employment?"
From The Telegraph:
Quantitative Easing has become banal, a fine-tuning tool like any other. It is by now drained of all drama. Even the Federal Reserve’s hawks have lost the will to resist. Five of the six critics acquiesced.

The Fed will buy a further $40bn (£25bn) of mortgage bonds each month until the jobs market improves “substantially”, and more if need be. It is open-ended. Zero interest rates will continue until mid-2015.
It is pocket-sized compared with the pace of $75bn a month in the QE heyday, or the 500 basis point rate cuts at the onset of the Great Recession. This is calibrated, not full-throttle.
Fed chairman Ben Bernanke no longer faces a banking collapse, or an imminent spiral into debt deflation. He has launched QE3 at a time when credit is expanding, M3 money is growing at 5pc, and core inflation is above 2pc. This is QE by choice. The extra juice is insurance against a clutch of nasty risks ahead: a Chinese hard-landing, deepening slump in Europe, and the looming “fiscal cliff” in the US – net tightening of 4pc of GDP if Congress lets it happen.
This is well-advised. The manufacturing ISM index in August flashed contraction. New orders were awful. The economy is close to a tipping point, and that matters for the whole world. 
A study by Nathan Sheets at Barclays Capital found that once US growth drops below 1.5pc on “a rolling four-quarter basis”, it then falls by nearly 3pc over the next year. “We find that the spillovers are much larger as the US economy cuts through its stall speed, with the sensitivity of foreign growth roughly twice as large as at other times,” he said.

Yet Mr Bernanke’s main eye is on America’s intractable jobs blight – “a grave concern, not only because of the enormous suffering and waste of human talent it entails, but also because high levels of unemployment will wreak structural damage on our economy that could last for many years”, he said

The Fed has switched to targeting jobs – not prices – sure that the headwinds of debt-deleveraging will check inflation. This is a contentious point. Minneapolis chief Narayana Kocherlakota says lack of jobs skills imply less slack than assumed – known as an upward shift in the “Beveridge Curve”. The problem is “structural”....MORE