By Steven K. Beckner
JACKSON HOLE, Wyoming (MNI) – Richmond Federal Reserve Bank
President Jeffrey Lacker and St. Louis Fed President James Bullard cast
doubt Saturday on contentions that further Fed easing can be effective
in reducing unemployment.
Lacker in particular maintained that much of the 8.3% is
“structural” at the Kansas City Fed’s annual symposium and suggested
that the non-accelerating inflation rate of unemployment (NAIRU) is
higher than normal, suggesting less resource slack and hence less Fed
room to ease without inflationary consequences.
Stanford Professor Edward Lazear, a former chairman of President
Bush’s Council of Economic Advisors, presented a paper arguing that most
of the unemployment is “cyclical” and hence amenable to monetary easing.
Lacker said the JOLTs data on job openings in various industries
are of “limited” use for measuring skill “mismatches” in the labor
market that tend to hold up the unemployment rate.
Relying on the JOLTS data is “like looking under the street lamp
and saying well, i haven’t found any mismatches,” he said.
But Lacker said he is seeing ample evidence of such mismatches in
his district, which runs down the East coast from Maryland through the
Carolinas.
“In manufacturing in the Carolinas, we’ve lost a ton of jobs in
textiles, apparel and furniture,” he said, yet there is a “scarcity” of
skilled machinists, aircraft mechanics and other trades.
“So I think the coarseness of the data hide what could be a fair
amount of skills mismatch,” Lacker continued. “I think it’s quite
unhelpful to equate structural and permanent factors.”
“These skill gaps that we see are going to be overcome,” Lacker
went on. “People are working on training programs … . Over time these
gaps will close, but in the meantime these are real costs, real
impediments to clearing labor markets the way we want them to.”
“And it’s not clear monetary policy can obviate these costs in any
meaningful way,” Lacker added.
“I think the useful distinction is between the unemployment rate
that would prevail several years from now in the absence of shocks and
with appropriate monetary policy and the unemployment rate that now
would correspond to maximum employment … . Sept. 1, 2012 maximum
unemployment,” he said. “I think that’s a useful distinction to carry
around. the former is likely to be quite smooth (without shocks) … the
latter I see no economic reason why the natural rate defined that way
isn’t likely to respond to a variety of shocks, isn’t likely to vary
quite substantially,” he said.
Bullard said “it’s the elephant in the room for this conference as
to whether the U.S. economy went through some kind of structural shift
associated with this very large financial crisis and its aftermath. If
you look at the level of real GDP.”
“It sure looks like the economy was on one trend pre-crisis and is
on a very different trend post-crisis, and I think the longer this goes
on, the stronger the statistical evidence will be that we’re on a
different trend,” he continued.
“Now you can posit ideas about why this is, but it does have
startling policy implications,” Bullard said. “It could mean that the
cyclical adjustment that can be attained in a normal business cycle
sense has already happened and that what goes on from here is very
different from the ordinary reaction to a recession that you might
normally be thinking of.”
The comments from two of the more hawkish members of the FOMC came
toward the end of two days of spirited discussion which revolved around
whether the Fed should inject more monetary stimulus and, if it does,
how effective it would be.
Chairman Ben Bernanke set the stage Friday morning in a keynote
address in which he appeared to leave all options open for the FOMC’s
Sept. 12-13 meeting.
Citing unsatisfactory growth and calling high unemployment a “grave
concern,” Bernanke vowed, “”Taking due account of the uncertainties and
limits of its policy tools, the Federal Reserve will provide additional
policy accommodation as needed to promote a stronger economic recovery
and sustained improvement in labor market conditions in a context of
price stability.”
Bernanke said additional asset purchases would have costs that must
be weighed against the benefits, but called them “manageable.” And he
said, “we should not rule out the further use of such policies if
economic conditions warrant.”
Former Fed Vice Chairman Alan Blinder lent his support to further
use of unconventgionmal policy tools Saturday, even pushing his proposal
that the Fed make the rate of interest it pays on exccess reserves
negative, so that banks would have to pay the Fed to hold them, in an
effort to induce banks to lend more.
But Columbia University professor Glenn Hubbard, a top campaign
advisor to Republican Presidential nominee Mitt Romney, told MNI the day
before he does “not think that more asset purchases are going to make a
material difference to the recovery.”
Hubbard, considered a possible successor to Bernanke should Romney
win, added, “I haven’t seen consistent evidence that asset purchases
have had real effects.”
Harvard Professor Martin Feldstein largely shared Lazear’s
conclusion that unemployment is largely cyclical — a view held by
Bernanke and most of his FOMC colleagues — but said that even if that
is true “there are limits to what monetary policy can now do.”
For example, he said the large number of Americans who cannot
qualify to refinance their “under-water” homes at low rates will not be
helped if the Fed pushes mortgage rates even lower. “And the same is
true of other parts of aggregate demand,” he said.
Feldstein, also a former CEA chairman and head of the National
Bureau of Economic Research, told the symposium that quantitative easing
“made an imporatant contribution in 2008, but there are limits, perhaps
compolete limites, to what monetary policy can do now.”
Feldstein said there are non-monetary policies, such as extended
unemployment benefits, that are partially responsible for keeping
unemployment up and limited the efficacy of monetary policy.
Athanasios Orphanides, a former senior Fed staffer and former head
of the Cyprus central bank, also advised caution, disputing Lazear’s
“implied policy prescription” that the Fed should keep pushing money
into economy to reduce unemployment.
Since there is uncertainty about where full employment, or NAIRU,
really lie because of uncertainty about its cyclical and structural
dimensions, Orphanides said “prudence would dictate that we should not
assume” that there is a “new normal” in unemployment.
Orphanides said the Fed is better off aiming at price stability. If
it aims instead for a certain loevbel of unemployment “if it
miscalculates — disaster.”
In other comments in the final day of the symposium, Bank of Japan
Governor Masaaki Shirakawa said that, taking into account the “global
Taylor Rule weighted average policy rate” and the average inflation
rate, worldwide inflation is measuring too low at “below 1%.” He said
that “means the Taylor principle is not satisfied…”
He was referring to the Taylor Rule, named after Stanford professor
John Taylor, which essentially directs the central bank to adjust
short-term interest rates when inflation and unemployment deviate from
specified norms, is considered a model of how to operate monetary
policy.
Shirikawa said the reason why inflation is averaging so low
worldwide is because central banks typically “focus on the core
inflation rate instead of the headline inflation rate…” He said that
is inappropriate “in a world where food and energy prices are determined
globally.”
Shirikawa also said some countries are being forced to expand their
money supplies to counteract the effect of capital inflows that are
causing their currencies to appreciate.
That was a point echoed by Malaysian central bank chief Zeti Akhtar
Aziz. She said expansionary policies by the Fed and other western
central banks are putting upward pressure on Asian currencies and asset
prices, hurting their economies and complicating their policies.
** MNI **
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