While the markets were surprised last month when the Federal Reserve’s Open Market Committee decided to chop off about $10 billion per month in monetary stimulus (also known as quantitative easing), it’s becoming clear that the jobs situation was not one of the driving forces behind the decision.
While the topline jobs rate has plunged, it’s only because the labor force is contracting as people stop looking for work.
It looks like the Fed decided to cut down QE is spite of the poor jobs market. And that can only mean the Fed theoreticians are beginning to be worried about inflation.
The reduction in labor force in the U.S. is comparable to losing the state of Maryland or Missouri in terms of productivity and GDP. We are missing between $250 and $300 billion in lost GDP because of these jobs losses, which is right around 1.5 to 2% of GDP growth. Not coincidentally, that’s the same number that has been historically missing from Obama's stewardship of the economy.
And things are getting worse, not better.
The missing workers in August of 2012 were 4.4 million. Now it's grown 5.9 million according to an estimate from the union run Economic Policy Institute (EPI). It’s worth noting that only 1,374,000 jobs have been created since Dec 2012, while an additional 1,500,000 workers have left the workforce according to the EPI estimate.
“The economy still needs the support of a very accommodative monetary policy,” said William Dudley, last fall in a speech in New York according to the text of the speech provided by Bloomberg.com. Dudley is vice chairman of the Federal Open Market Committee, the committee that decides on continued quantitative easing measures. “Improving economic fundamentals versus fiscal drag and somewhat tighter financial conditions,” he said, “are pulling the economy in opposite directions, roughly cancelling each other.”
Dudley later more closely defined what he meant regarding fiscal drag by pointing to: 1) tax increases and 2) government budget cuts. But he also pointed out that the jobs picture isn’t quite a rosy as all that, either.
The unemployment rate, which had declined from 8.1 percent to 7.3 percent, topline, by fall, and now all the way down to 6.7 percent “overstates the degree of improvement” that jobs have made in the economy overall, he said
In December of 2012 Fed chair Ben Bernanke said that the reserve bank would like to see stimulus measures end when unemployment reached 6.5 percent.
But in June of this year, Bernanke then introduced new math to the equation by saying that unemployment would likely be around 7 percent when the tapering of quantitative easing would end.
“In this scenario when asset purchases ultimately come to an end the unemployment rate would likely be in the vicinity of 7%,”Bernanketold a press conference, “with solid economic growth supporting further job gains — a substantial improvement from the 8.1% unemployment rate that prevailed when the committee announced this program.”
Bernanke said back then that quantitative easing would be wrapping up sometime next year, while actual tapering would likely begin last fall.
And what’s changed since then?
As Dudley has pointed out, the labor market isn’t as robust as the underlying numbers would suggest.
The labor market is being adversely affected by Obamacare.
“I think businesses are very uncertain as to what's going to happen,” Bob Funk, CEO of Express Employment Services, the country’s fifth largest staffing company toldCNBC. “And many companies are going to flexible staffing, instead of full-time employment. And our position as a company we want to go from part-time staffing or temporary staffing to full-time employment. The government's going just the opposite direction, from 40-hour workweek down to 29-hour workweek. Great for our company, but not healthy for the country.”
So why the decision to cut QE now, even with all the labor market uncertainty? I can’t say for sure without speaking with each of the Fed regional presidents. But if it’s not because jobs are plentiful, it must be to address the risk of inflation.
In early September noted monetary hawk Dallas Fed president Richard Fisher said that Obamacare was hurting the economy and quantitative easing was not helping with hiring. He is widely quoted as saying “I was against QE3. I don’t believe it had any efficacy” in terms of the labor market and hiring.
“Ask any manufacturer what holds him or her back and they will tell you that they can’t operate in a fog of total uncertainty concerning how they will be taxed or how government spending will impact them or their customers directly,” Fishertold US manufacturers in August “And as to asking their opinion of the impact of regulation on their businesses—from the Affordable Care Act to the thousands of other regulations enumerated in the Federal Register—don’t even go there, unless you delight in hearing profanities.”
The problem says Fisher is how to end quantitative easing without killing the financial markets. As time goes on the expectation is that inflation will eventually kill the economy.
"Especially given that we have a surfeit of excess liquidity sloshing about in the system, the idea of ramping up inflation expectations from their current tame levels strikes me as short-sighted and even reckless," said Fisher last month.
One need only look at the rally in theTen-Year Treasuryon the heels of the bad jobs report to see how stimulus dependent financial markets are.
Financial markets aren’t necessarily healthy when they are making new highs on expanded price earning multiples versus expanded profits.
That’s one of the inflationary effects of QE.
But when tampering starts in earnest you could see that liquidity stop pushing the markets higher, while pushing the prices of things that you buy at the store higher.
And it’s inflation that the Fed dreads more than unemployment.
They just proved it.