The Fed Cannot Fix Unemployment


Posted in: Economics, General, Stock Market, Thought of the Week

As you may know, the Fed has made the decision to move forward with the third round of Quantitative Easing (QE3). Our Investment Committee has been highly critical of this program from the start because they believe the program has done very little to improve unemployment in the U.S. The original plan for QE3 was to keep bond yields artificially low to incentivize businesses to borrow cheap money to hire new workers, build new plants, etc. As the economy improved over time, the Fed believed that unemployment would subsequently fall. The Fed created a dual mandate that would be used to gauge the duration of QE consisting of:

  • Targeting unemployment to fall below 6.5%
  • Keep inflation below 2.5%, which is where the Fed will typically act to cool down the economy

Last week, the Fed announced that they will forgo the unemployment mandate and instead, look for more qualitative factors to gauge the real health of the labor market. The first major problem with our labor market is that those who have been out of work for more than 26 weeks (long-term) are having a really tough time finding jobs. Currently, long-term unemployment is around 2.5%, which is way above its average of 1%. This is a critical number because when someone looking for a job becomes discouraged, this represents a structural problem in our economy.

The second issue with our labor market is slightly more difficult to quantify because it has to do with small business employment. Small businesses represent over 50% of the working population and account for over 65% of new jobs since 1995, according to census data. However, they have not been hiring much since the financial crisis of 2008. Our Investment Committee believes this is because of the uncertainty surrounding healthcare costs with small businesses. Since nobody really knows how Obamacare will ultimately shape healthcare costs for companies, small businesses of all sizes are hesitant to hire and waiting for further clarity.

To sum it up, Our Investment Committee still believes that the U.S. would be better in the long run if QE3 just went away. QE3 will not fix the structural issues with unemployment in our economy.  The only real certainty is that the change in Fed policy will continue the “War on Seniors and Savers”. Our Investment Committee will carry on the search for attractive risk-adjusted yield in this artificially low interest rate environment.

Read this week’s Thought of the Week to learn more about the third round of Quantitative Easing.

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As an Investment Advisory Representative working in conjunction with Global Financial Private Capital (GFPC) we are provided weekly thoughts on what is happening in the economy and the market. Written by our investment committee at GFPC we find these thoughts to be informative and interesting.