“Bernanke said, in essence, that he wasn’t a magician.”
Heidi Moore, The Guardian
The number one movie in America today, “Oz, the Great and Powerful,” could be a metaphor about The Federal Reserve Board and its role in the American economy.
Oz, a likable scoundrel, is a master of illusion. There is no substance behind his tricks, but they give the illusion of strength, and, since people believe what they want to believe, he is able to overcome the forces of evil.
Likewise, Fed Chairman Ben Bernanke’s prestidigitation relies on quantitative easing to create the illusion of strength. All appears well when the stock market rises and the unemployment rate drops, even if there is no strength behind the market’s rise and the drop in unemployment is by only 0.2%.
Of course, the U.S. Bureau of Labor Statistics has its own illusionists, as we’ve pointed out in the past, who are able to make a 14.4% unemployment rate look like a 7.7% unemployment rate.
But it’s The Fed that’s running this Land of Oz, and at The Fed, the yellow brick road leads to only one place – quantitative easing. As an economic elixir, QE has proved to be snake oil. Yet Chairman Bernanke plans to keep peddling it as long as he’s able, consequences be damned.
He announced this week that the Fed plans to keep going at least until the unemployment rate falls to 6.5%. The Fed doesn’t expect that to happen until 2015.
Will it happen even then? Even if it does, will QE end? More importantly, is there any evidence whatsoever that QE has an impact on the unemployment rate?
QE and Unemployment
The Fed began its first of three rounds of QE in 2008. At the beginning of 2008, the official unemployment rate was just 5%. The crisis worsened, and by Jan. 1, 2009, the rate was 7.7% – the same as it is now. A year later, even with QE in full swing, the rate jumped to 9.7%.
Maybe the unemployment rate would have been even higher without quantitative easing. Or maybe quantitative easing has no impact on the employment rate.
Supporters would argue that, by weakening the dollar, QE makes U.S. exports more attractive and is good for business. However, consumer spending is at the core of economic strength. QE makes imports – including necessities such as oil – more expensive. At the same time, retirees who rely on interest from their CDs to produce income are seeing their buying power erode, as the rate of inflation exceeds the interest they receive.
But let’s take a leap of faith and give QE full credit for reducing the unemployment rate by 2% over the course of four years. It still has another 1.2% to go to reach the modest 6.5% goal. At the rate the unemployment rate has been dropping, that would mean nearly two-and-a-half more years of quantitative easing.
However, keep in mind that the economy had been growing for several years now, albeit at a miserably low rate. What will happen to unemployment numbers if the U.S., like Europe, has another recession?
So far, Fed bond buying through three rounds of quantitative easing has totaled $1.6 trillion and it’s currently continuing at a rate of $85 billion a month. Maybe we’re just not buying enough bonds for QE to work. Or maybe it just doesn’t have a significant impact on unemployment rates.
“Oz, the Great and Powerful” had a happy ending. Will QE3?