So the Federal Reserve has decided that the economy is too weak to begin tightening the money supply. What interests me most about this decision is the decision to tie this to the unemployment rate.
According to the FOMC statement:
In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal
Coincidentally, I happened upon this great article discussing the concept of Peak Employment. Historically the argument has always been that technological advancements have always created more jobs than they have eliminated. This article theorizes that we have passed Peak Jobs – and we are at the point where technology is and will continue to eliminate more jobs than are created.
I think there are a couple indicators that could support this – rising worldwide unemployment rates and the shrinking of the middle class
Note this chart that is included in this article:
Rising unemployment is shifting the middle class bell curve bulge to the left (and think about how much higher unemployment int the United States would be if we weren’t spending record amounts on defense spending). This number is also supported by the multi-year decline in median family income. So if we as a society have passed peak employment, this economic tipping point is bigger than the Fed, perhaps bigger than one government can manage. A new plan for capital allocation needs to be devised.
In the meantime, lacking any big ideas, the Fed is spending our capital on an outdated economic model. Like the French that built the Maginot line after World War I, the Fed is fighting a battle using an obsolete strategy. A look at banks excess reserves during this period of quantitative easing is an indicator that the strategy of pumping money into the economy is ineffective. The Germans proved the Maginot line to be useless in World War II. I hope the Feds strategy of battling the economy based on outdated ideas turns out better for the United States than it did for France.