The Federal Reserve set the target range for the federal funds rate at 0 to 25 basis points in December 2008. It has remained there because the recovery in output and jobs has been so slow. The rate was set so low to stimulate aggregate demand and job growth (by lowering borrowing costs for consumers and firms). With low interest rates, consumers are more likely to increase spending now rather than wait to consume later. Low interest rates also drop the cost of borrowing to invest in productive capital. The increased demand for consumption and investment then leads to higher demand for labor. But of late, the low interest rates do not seem to be having much of the intended effect, either on spending or on job growth.
The Federal Funds Rate and the Employment-to-Population Ratio
SOURCES: Federal Reserve Board, Bureau of Labor Statistics/Haver Analytics.
NOTE: The shaded areas indicate recessions.
One way to gauge job activity is to look at the ratio of employed people to the civilian population. The employment-to-population ratio falls whenever people quit their jobs and leave the labor force. It also falls when workers are laid off and counted among the unemployed. The figure shows this ratio from 1990 through 2012. The shaded areas represent recessions. As can be seen, the employment-to-population ratio dips to a trough early in each recovery, but the most recent recovery is distinguished by the failure of this ratio to rebound from the post-recession low.
The figure also shows the federal funds rate over the same period. A cursory glance reveals positive comovement between the employment-to-population ratio and the Federal Reserve’s policy rate.
Chosen excerpts by Job Market Monitor
One of the main policies to reduce long-term unemployment is an active labor market policy. The OECD publishes each year data on Government investments in labor market programs like training and wage subsidies.
Gemany and the Scandinavian countries are champions of active labor market policies. This is well known. But, less known is the fact that the US are not. US investment in active labor market programs before the Great recession wasbelow the OECD average, nearly 4 times lower: 0.13% of GDP vs 0.48%.
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The Federal Reserve announced Wednesday that it will take unprecedented steps to bolster the economy, saying it will continue to stimulate growth until the unemployment rate falls to 6.5 percent or the inflation rate reaches 2.5 percent. The Fed said it did not expect unemployment to reach that benchmark until 2015. It was a historic … Continue reading »