The Fed To The Rescue For The Long-Term Unemployed

by: Bondsquawk, CFA

by Rom Badilla, CFA

Due to the housing bust and subsequent financial crisis, this isn't your typical post-recession recovery as consumers, businesses, and governments (here and abroad) continue to de-lever from excessive debt levels. Countries like Japan have shown that recoveries following an asset bubble can last for years-- and in their case, for decades.

As a result, excess capacity such as those filling the ranks of the unemployed are prevalent and continue to linger. While the Unemployment Rate has fallen from the low double digits, it remains well above the pre-recession lows of 4-5% and prospects for a return to those levels do not appear imminent anytime soon. More importantly, individuals who suffer from long term unemployment continue to remain elevated.

As evident by the top portion of the chart below, those who are unemployed for more than 6 months have spiked due to this recent recession and have remained elevated at that time. Currently, there are close to 5.2 million job seekers who have been down and out for more than 6 months.

Long Term Unemployed & Recessions

Because of their dual mandate to fight both unemployment and price instability, this is a major concern by the Federal Reserve since these individuals experience an erosion of skills and qualifications while they remain idle. This can lead to leaving the workforce permanently, since they are less likely to find a job. This in turn translates into a permanently a lower participation rate of the workforce which can lead to lower levels of productivity for an economy. Furthermore, these individuals become a drag from a social and economic standpoint. Since policy makers think the excess capacity in the workforce exists because of a lack of aggregate demand and a stagnant economy, they are compelled to do something about it.

Federal Reserve Chairman, Ben Bernanke did not announce any definitive plans for further monetary policy action in his Jackson Hole speech on Friday. Though, he did make the case for it by discussing the costs and benefits of unconventional easing policies, which implies that the economy is on notice and action is on the horizon, either at the September meeting or at a later date.

Whether it is future guidance on the likely path of interest rates in the future or on balance sheet expansion, it remains largely on the economic data.

While both potential actions are stimulative in that they can have an effect on interest rates and hopefully on the economy, the latter is easier to implement while the former is more drastic and definitely on the radical side of the "unconventional" policy action spectrum.

Given the lackluster but positive growth, it seems likely that the Federal Reserve will refrain from using Quantitative Easing and use communication instead by changing its guidance on rate hikes at the upcoming meeting.

Whether it will be another round of Quantitative Easing or fixing the federal fund rate, it is very hard to forecast that the unemployment rate will decline in the short run, or ever. Maybe it is not that we have a cyclical irregularity in the Unemployment Rate but the natural Unemployment Rate has grown over time. However, it is still too early to give up our hopes for recovery in the labor market. With the blindfolded economy on the cliff, the only thing we can hope for is that people move over their funds from deleveraging to actually consumption, a more direct boost to the economic activities than any of the FOMC's solutions.

Disclaimer: The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of Bondsquawk or its employees.