Stock markets cheered Janet Yellen’s maiden congressional testimony this past week, as the new Fed chair emphasized the word “continuity” and offered no boat-rocking surprises. Continuity? I assume she means a steady diet of tapered bond purchases that will lead to the end of QE3 this autumn. In other words, investors seemed to think QE has run its course, probably overstayed its welcome, and that it’s time the Fed got out of the bond-buying business, since that policy isn’t doing much good and may be doing harm.
Ever the Keynesian who subscribes to the non-existent, long-term trade-off between employment and inflation, Ms. Yellen did express worries about long-term layoffs and the shrinking size of the labor-participation rate. She’s right about that. The labor situation is subpar.
The employment-to-population ratio is only 58.5 percent, way below its year-2000 peak of 65 percent. The participation rate is a low 62.8 percent, way below its modern average. The Joint Economic Committee estimates that jobs are 4.5 million below the employment trend line since 1960, and 7 million below Ronald Reagan’s recovery rate. And average monthly private-payroll increases are only 178,000 in Obama’s recovery. Compare that with the Reagan monthly rate of 330,000.
So Yellen is right to be worried about jobs. But she’s wrong to think the Fed can do much about this.
Read my full column here.