Adam Posen: Why has the Fed given up on America’s unemployed?:
What a reversal from just a year ago. Last summer the US Federal Reserve’s Jackson Hole conference ended with a paper by Edward Lazear, a prominent Stanford economist, who argued that almost all US unemployment was cyclical and thus reparable through stimulus. That conclusion was then welcomed by Ben Bernanke, the central bank’s chairman. It was consistent with the Fed’s insistence that the level of employment that can be sustained by the US economy without stoking inflation--the “Nairu”, the non-accelerating inflation rate of unemployment--had not risen. Policy makers had not yet accepted high unemployment as a fact of life…. Yet for the past three months, despite little improvement, most members of the FOMC have spoken about a desire to “taper” off stimulatory policy by September. They reaffirmed that desire even after the market interest rates rose almost 100 basis points as a result of their statements. This credit market tightening, combined with the ham-fisted fiscal sequestration--the across-the-board cuts in federal spending that took effect in March--have dragged on US growth…. The costs of pushing a bit too far are small and reversible. But the costs of letting unemployment persist are vast. Even reforms to reduce structural unemployment, which worked in Germany a decade ago or in the US a decade before that, only take effect in an expanding economy. There is no good reason for the Fed to give up on the labour market – and thus no good argument for allowing the de facto tightening of monetary conditions to stand.