February 20, 2013

Growing Workforce? Shrinking Job Market? Fed Adviser Finds Silver Lining

Short-term problems could be long-term employment windfalls

You’d think a larger labor force with no jobs would be a problem. Not in the long term, according to Bloomberg.

The news service noted on Monday that while the growing labor force currently being seen will slow the fall in unemployment in the short run, in the longer run, “a bigger supply of labor is good news because it swells the pool of Americans available and willing to work, enhancing the economy’s potential to grow.”

Citing Julie Hotchkiss, a policy adviser at the Federal Reserve Bank of Atlanta, the news service pointed to an additional silver lining for investors: “The gradual fall in unemployment will allow policymakers to keep monetary policy looser for longer without having to worry about igniting a wage-driven rise in inflation.”

It’s the epitome of a “goldilocks economy,” Bloomberg reported, meaning it’s “not too hot to get the Fed worried about inflation and not too cold to have investors fretting about a relapse into recession.”

The result is a Fed policy of continuing to do exactly what it’s been doing; the central bank continuing to buy debt at an $85-billion-per month clip in 2013 and then extending its purchases through next year, albeit at a reduced pace.

“The Fed’s first interest-rate increase won’t come until the beginning of 2016, when unemployment finally dips below the central bank’s threshold of 6.5%, Jan Hatzius, chief economist at Goldman Sachs Group in New York, told the news service.

Joblessness will drop to 7.5% by December and 7% by December 2014, according to economists at the San Francisco Fed. The cumulative 0.8 percentage-point decline they foresee this year and next follows a 1.5-point reduction in the past two years.

The U.S. economy unexpectedly shrank from October through December 2012, the first quarterly drop since 2009, and unemployment numbers ticked slightly higher in January. Consumer confidence also hit a four-year low.

------------

Read Fed Minutes Show Worries About Bond Purchases on AdvisorOne.

Reprints Discuss this story
This is where the comments go.