USA Today, September 18, 2013
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Given recent data on the state of the labor market and the economy the Fed made the right call by continuing its policy of quantitative easing at the rate of $85 billion a month. The economy remains very weak by every measure, with the labor market well below full employment, and no evidence of inflation anyone in sight.
The quantitative easing policy has helped bring down long-term interest rates. This has had a modest positive effect in promoting economic growth, primarily by allowing tens of millions of people to refinance mortgages at lower interest rates. It also has made it somewhat cheaper for businesses to borrow, thereby giving a small boost to investment. It also lowered the cost of buying a home, helping to get the housing market back on its feet.
Earlier in the year there was actually a real basis for concern about incipient bubbles in the housing market, with prices rising at 30-40 percent annual rates in several major markets. However the jump in interest rates after Bernanke first raised the prospect of a taper in late June seems to have taken the air out of these bubbles.
With the threat of a new bubble having dissipated there is no reason the Fed shouldn’t be doing everything it can to boost the economy. The latest data show the core inflation rate is just 1.8 percent over the last year. This is below the Fed’s 2.0 percent target.
Meanwhile the labor market remains weak. The unemployment rate has fallen from its peak of 10.0 percent in 2009 To 7.3 percent, but this is mostly because people have given up looking for work. The employment to population ratio (EPOP) is just 0.4 percentage points above its low for the downturn. It is still more than 4.0 full percentage points below pre-recession levels, corresponding to 9.5 million fewer people with jobs.
And this is not a story of aging baby boomers. The EPOP among people ages 25-54 is down by 4.0 percentage points from its pre-recession level. Furthermore, the weakness of the labor market drags down large segments of the workforce as many workers find it impossible to get wage increases when the labor market is so weak.
In short, the distribution of income is a central part of the Fed taper story. Supporting a taper means weakening workers’ bargaining power and continuing the upward redistribution of income of the last three decades. More quantitative easing is a story of more jobs and higher wages, however limited the effect might be.