The Federal Reserve Bank of San Francisco now estimates in a new study that, based on its analysis and historical modeling, business uncertainty about Washington, D.C., policy moves (tax cuts, spending) has “lifted the U.S. unemployment rate by at least one percentage point since early 2008.”
The Fed study says: “Heightened uncertainty acts like a decline in aggregate demand because it depresses economic activity and holds down inflation. Policymakers typically try to counter uncertainty's economic effects by easing the stance of monetary policy. But, in the recent recession and recovery, nominal interest rates have been near zero and couldn't be lowered further. Consequently, uncertainty has reduced economic activity more than in previous recessions.”
To read the study, click here.
“In other words, the unemployment rate would be 7%--and not 8%-- if Congress has a spine and actually made decisions rather than punting issues until after the elections,” says FOX News analyst James Farrell.
Meaning, why invest hard-earned capital in plant, equipment and jobs if you don’t know what D.C. is going to do? And why should bankers lend now, if they’re earning no interest profits on their loans?
The implication of the Fed study is that all of the shovel-ready money printing by the Federal Reserve won’t change the jobless pattern. Which is bad, because the Fed will be easing into the next recession, which means it’s up to D.C. to ease up on businesses.
As Tim Duy at Fed Watch notes, the Federal Reserve likely extended its zero bound interest rate policy to June 2015 because it sees that a recession will come by the second half of 2015, as historical data show the average peak to trough business cycle for the last three recessions is 96 months, meaning, from December 2007, Duy says.
Which means the Federal Reserve is not pushing on a string, it’s pushing on microscopic fiber optic thread to fix the economy.
Elizabeth MacDonald joined FOX Business Network (FBN) as stocks editor in September 2007.
Follow Elizabeth MacDonald on Twitter @LizMacDonaldFOX.