The FOMC released its latest statement on monetary policy on June 15, 2016. As expected, the Fed did not hike its target federal funds rate.
According to the statement, jobs were a big driver in the decision to not hike.
The statement read, “Information received since the Federal Open Market Committee met in April indicates that the pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up. Although the unemployment rate has declined, job gains have diminished.”
I have already written about how unemployment statistics don’t give us a good picture because of all of the variables. And the jobs issue, in and of itself, is rather meaningless to economic growth.
One of the big mistakes that almost everyone makes is assuming that jobs are an indicator of prosperity. But jobs are not what make us wealthy or increase our living standards. Productivity is key.
The government could create a whole bunch of jobs, but it doesn’t mean we are better off, especially if they are mostly useless.
Jobs are not unimportant, but it is a confusing issue. The reason that unemployment rises during a recession is because it signals a reallocation of resources. The fact that some jobs are going away is just an indication that it was a previous misallocation.
But in terms of jobs, there is always work to do, as long as we live in a world with scarce resource.
The FOMC statement was similar to its last statement in April, except for the somewhat bearish statements (at least by Fed standards) on the jobs picture.
As a side note, it drives me nuts when I hear Obama talking about creating 14 million jobs, or whatever number he is using now. In the words of Obama, “You didn’t create that.” And that number is meaningless because he started during a deep recession. Also, how much do those jobs pay? Also, how much has the population increased since that time?
Back to the FOMC statement, it was interesting that Esther L. George – one of the committee members – voted in favor of the Fed’s action to essentially do nothing. She had previously dissented, saying that she thought the target rate should be raised. This time, it was a unanimous decision.
Does she see something coming? If the Fed still can’t raise rates, what are they so fearful about? Will the Fed even raise rates at all in 2016?
I have said that the federal funds rate does not mean as much as in the past because it is not dictating monetary policy, at least directly. Still, it could impact market rates and bank lending to a certain extent. If the Fed can’t raise the rate it pays to banks by one quarter of a percent, what does that tell us about the fragility of the economy?
I still have my bets on a recession in the near term, but these things can take a while to play out. Politically speaking, it will be interesting if a recession hits within the next 4 months before the election.