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Federal Reserve Misses The Target

Posted by Larry Doyle on December 13, 2012 8:21 AM |

Stand back.

A marksman with a powerful weapon not properly focused on an appropriate target is capable of wreaking real havoc.

Who is the marksman? Federal Reserve chair Ben Bernanke. What is his powerful weapon? Monetary policy. What is the appropriate target? The level of employment in our nation. What might be the havoc? The list is too long but let’s start with a breakdown in the relationship between monetary policy and inflation and work our way to civil unrest. Havoc does not typically connote a well defined set of outcomes.

Am I being overly alarmist? I think not given the size of Bernanke’s weapon and how wildly off target he really is in the message he sent the markets just yesterday. What did he say? 

As reported by the WSJ, Fed Ties Rate To Joblessness,

The Fed said it didn’t expect to touch short-term rates until it saw the unemployment rate fall to 6.5% or lower, as long as inflation forecasts remain near its 2% target. That would mean, according to the Fed’s economic projections, that it would keep short-term rates near zero into 2015.

That is a dangerous message folks. Why so? Recall that just last week we saw the unemployment rate drop from 7.9% to 7.7%. Indications of an improved labor situation? Anything but. The decline was due almost entirely to a decline in the labor force, that is, people had literally given up looking for work. I wrote last Friday,

As I have indicated previously, we could have an unemployment rate of 5%, the cheerleaders in Washington popping champagne, and be entering into a deeper recession. How so? If people continue to simply give up looking for work and exit the labor force. Just because these people are not counted when calculating the unemployment rate, does that mean they do not even exist?

The move down from an 8.5% rate was due almost entirely from a decline in the labor participation rate as detailed in this report at BusinessInsider

Conversely, if some of these people whom have exited the labor force reenter due to an improving economic condition we could very well see the rate move back up.  In that sort of scenario the markets would read Bernanke’s message as if he would be adding another chamber to his weapon when in fact he should be taking a few bullets out. To think that Bernanke can stop the weapon from misfiring based on a read of inflation data would be to convey on him a set of powers that nobody possesses. I am guessing that Ben is already aware that global food prices are at record highs. (see page 49 in this packet put forth by Doubleline.)

What should the target be? A focus on the overall unemployment rate in conjunction with the labor force participation rate. More accurate information allows Bernanke to fine tune his accuracy and market participants and business executives to plan appropriately. Why doesn’t Bernanke do this? I guess he would have to admit that the “keep them in the dark” practice of misinformation or less than full information is not consistent with appropriate public policy.

Be careful out there . . . and navigate accordingly.

Larry Doyle

Isn’t it time or overtime to subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook.

I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • fred


    Your comments are spot on, however, I keep telling myself two things 1)Bernanke is no dummy, 2)the Fed mandate is anchored to the employment rate and the inflation rate so that’s really all he can talk about.

    Benny has already changed his inflation gauge from CPI, to core CPI, to personal consumption expenditures. I’m sure his nuances with the employment rate will be just as creative.

    All you really need to know is two things, 1) the Fed will maintain ZIRP for as long and as far as the eye can see. 2) the Fed is directly responsible for global food and energy prices.

    Just as the Fed has conveniently found a way to omit food and energy from inflation it will find a way to omit the issues of the labor participation rate, under employment and full time v. part time employment from the employment discussion.

    • fred

      Let me add to my last comment, unless it “suits” the Feds purpose (ZIRP).

      • LD


        Good points. I think we need to put this all under the heading of “GARBAGE IN…GARBAGE OUT!!”

        • fred


          It really shouldn’t be this way…why isn’t Ben, or other members of our global and domestic leadership class, talking about the labor participation rate, under-employment, part time employment, food prices or energy costs.

          We got to get you a press pass LD!

          • LD

            Treat the American public like a bevy of mushrooms, that is, keep them in the dark and feed them a pile of s*%#

  • Randee

    Larry Doyle, you’re wrong as usual. The drop in the unemployment rate from 7.9% to 7.7% is a sign of the hard work put in by the Obama Administration for the past four years coming to fruition. It has taken this long after G.W. Bush got us into a huge hole. With continued hard work by President Obama the unemployment rate will continue dropping. Chairman Bernanke’s moves are spot on. Keep interest rates at 0 so wealthy Americans are forced to invest their money in the markets and not allow it to gather dusts in their trust fund safes. Then, that money needs to be redistributed to those hard working Americans who were not born with a silver spoon in their mouth.

    • LD


      I have been more than respectful to you and you can certainly feel free to spew forth your nonsense here but political bias and drivel is NO SUBSTITUTE for actually understanding the truth as to what goes on in the economy. The fact that you are ignorant as to what is really going on in terms of labor force participation and the like is not my fault.

      Yes, your ongoing commentary here simply stated displays your ignorance only matched by your abrasiveness and arrogance.

      This is no way to go through life.

      Remember, envy is a vice not a virtue. If you truly care to embrace the principles you espouse, I suggest a move to China or Cuba.

      Navigate accordingly.

      • Randee

        Larry, you calling someone abrasive and arrogant is like Donald Trump mocking another person’s hair. It’s simply hypocritical. What bothers me most about this site isn’t your and most of your readers far right, almost scary ideology. What bothers me most is the complete lack of respect for the office of president of the United States. While you may not agree that Barack Obama is a great leader (and I believe he will go down in history as our greatest president)the office itself should be accorded a certain amount of respect. You need to work on your manners. Mr Obama won a fair election. If you are incapable of paying him a modicum of respect then I suggest you navigate yourself to Canada or Costa Rica for the next four years.

        • LD

          Why should I waste my time? So I will not.

  • Stacy


    I am Canadian American and I am offended by your remarks.

    I have gone back and read some of your comments. I am a supporter of President Obama, President Obama practices and preaches tolerance, you disrespect him greatly with your intolerance.

    Your coronation of President Obama as being the greatest of Presidents is also offensive and hints of racisim; let’s allow term 2 to play out to see if he can be effective within the constraints of a divided Congress; if he can bring Congress together, there’s hope for us all. Maybe you and Mr. Doyle?

    Finally, although I do share your liberal bias and the fact that you support President Obama, I’m not so sure your abrasive comments help to promote our cause. Mutual respect begins in each and everyone of us, so Randee, please, let it begin in you.

    • Randee


      While I agree with some of your comments and on the need for we as a nation to quell the abrasiveness that’s grown so pervasive, and indeed threatens to send us toppling over a financial cliff, I do think that with the exception of an excellent health care system Canada has little to offer.

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