October 18, 2014
Steven Pearlstein is usually pretty astute in his comments on the economy, but not today. In his complaint about Yellen’s lose monetary policy he tells readers:
“With stock and bond prices back around record levels, however, and the recession long since ended, output, employment and business lending are above where they were at the height of the bubble. That is why the Fed has been winding down the extraordinary measures it took during the recession of buying up vast quantities of Treasury and home-mortgage bonds.”
Umm, no, this is just about 100 percent wrong. The Fed is not targeting the stock market, it’s not even particularly targeting the bond market, although lower interest rates (interest rates and bond prices are inversely related) do help the economy. And the fact that employment and business lending are above pre-recession levels has almost nothing to do with the time of day.
The recession began almost 7 years ago. Economies typically grow. This means that we would expect that in 2014 we would expect that employment and lending would be much higher than they were in the fall of 2007. The Fed is not looking to get back to pre-recession levels, it is looking to get back to the economy’s potential level of output.
And, we have large amounts of data showing that we are still very far from the potential level of output. The share of the prime age population (ages 25-54) that is employed is still down by more than 3.0 percentage points from pre-recession level. The share of the workforce that would like full-time jobs but can only get part-time employment is more than 40 percent above pre-recession levels. And the weakness of the labor market is still preventing most workers from seeing real wage growth which would allow them to share in the benefits of economic growth. Also, there is zero evidence of any inflationary pressure in the economy.
For these reasons, which Yellen and other people at the Fed talk about all the time, the Fed is keeping its foot on the accelerator rather the brake. This has nothing to do with Pearlstein’s fantasies about a “Yellen put” supporting the stock market.
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