Future Of The Federal Reserve

Fed data cruncher finding no new normal unemployment nationwide

Mary Daly holds up two charts containing 33 bars that all point down. They show eight industries getting hit equally hard after the 18-month recession ended in June 2009, suggesting that much of the past two years' high unemployment is broad-based and should dissipate as the economy improves.

Daly is among researchers throughout the Federal Reserve system -- from San Francisco to Philadelphia and the board in Washington -- who are scouring data, examining models and gleaning anecdotes to determine why the jobless rate has remained stuck around 9 percent or more since April 2009. Most are reaching the conclusion that any long-term, structural shifts in the labor market aren't significant enough to keep the U.S. from returning to a pre-crisis unemployment level of 5 percent to 6 percent by about 2016.

"If we were mis-measuring the natural rate of unemployment, I would expect to see rapid wage growth in some sectors offset by wage declines in others," said Daly, 48, who heads the Federal Reserve Bank of San Francisco 's applied microeconomic research department . "I don't see that. I see pretty uniform patterns across all sectors."

This means Chairman Ben S. Bernanke and his colleagues should be able to bring down unemployment by continuing to keep interest rates near zero, eventually stimulating demand and encouraging businesses to start hiring again, said Sung Won Sohn , former chief economist at Wells Fargo & Co. and now an economics professor at California State University -Channel Islands. The risk is they will leave record stimulus in place too long, sparking a rising price spiral.

"The research going on in the Federal Reserve is very important and critical in charting the future course of monetary policy, given the historically high jobless rate," Sohn said. If the cause is primarily structural, then the Fed "will have simply created more future inflation because of a flood of liquidity it has created."

The U.S. has recovered only 1.8 million of the more than 8.7 million jobs lost since January 2008, according to Labor Department figures, as companies such as Campbell Soup Co. and Lockheed Martin Corp. still shed workers. A report this month showed the unemployment rate rose to 9.2 percent in June, the highest this year, from 9.1 percent in May.

When asked during a June 22 news conference if there's a "structural issue" with unemployment, Bernanke said Fed officials "expect to see healthier job-creation numbers" and "payroll numbers improving relatively soon." The U.S. is "still some years away from full employment in the sense of 5.5 percent, say," he added.

Concurring Opinions » The Future of the Federal Reserve

3) A recent study by Renée B. Adams has documented that the Fed’s “banking representatives are more likely to be chosen from large banks,” and “the average stock price reaction to the appointment of a firm’s officer to a Reserve Bank board is positive only for banks.” It is part of a line of work that examines the extent of regulatory capture at the Fed, as Adams explains:

The Federal Reserve played an important role in responding to the current financial crisis (see e.g. Allen and Carletti 2010). It may play an even more important role in future crises, because the Dodd-Frank Act of 2010 expands the supervisory powers of the Fed. However, some argue[] that the Fed’s response to the crisis was tainted by conflicts of interest. Kelly and Hilsenrath (2009) and Hilsenrath and Fitzpatrick (2010) singled out the Federal Reserve Bank of New York and its relationship with Goldman Sachs in particular. Because of the criticism the Fed received, Section 1109 of the Dodd-Frank Act specifies that the Government Accountability Office must conduct a review of the Fed’s governance.

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