Federal Reserve

US jobs figures show Yellen has her work cut out for her

Optimistic Fed chairwoman has tough job ahead to keep US unemployment from derailing economy again

PUBLISHED : Tuesday, 14 January, 2014, 9:45am
UPDATED : Wednesday, 15 January, 2014, 1:24am

Some of the problems facing the world's biggest economy and the person about to take the second-biggest job running that economy were revealed in the US jobs report on Friday.

The unemployment rate dropped sharply to 6.7 per cent, but only 74,000 new non-farm jobs were created, the lowest number for three years and far fewer than economists expected.

Even making allowances for freakish factors at the turn of the year, the figures suggest that the situation facing the new chairwoman of the US Federal Reserve is more complex and potentially more worrying than all the economic wise men and women have imagined.

She defended … quantitative easing, which some critics claim has simply made the rich richer

Enter Janet Yellen, termed the "16 trillion dollar woman" by Time magazine, a reference to the size of the US economy, far bigger than still rapidly growing China, its nearest rival.

Yellen, the first woman to hold the job in the Fed's 100-year history, is something of a comparatively unknown known quantity.

She has been deputy to outgoing chairman Ben Bernanke for the past three years and before that was San Francisco Fed president but has largely kept out of the limelight.

Commentators predict that Yellen will be greatly concerned about employment, which is one of the two tasks enjoined on the Fed, the other being control of inflation

In her Time interview, Yellen was optimistic: "We'll see stronger growth this year". She was "hopeful that the first digit [of gross domestic product growth] could be 3 rather than 2 … The recovery has been frustratingly slow, but we're making progress in getting people back to work, and I anticipate that inflation will move back toward our longer-run goal of 2 per cent".

She defended the Fed's programme of quantitative easing, which some critics claim has simply made the rich richer. "You know, a lot of people say this [asset buying] is just helping rich people, but it is not true. Our policy is aimed at holding down long-term interest rates, which supports the recovery by encouraging spending," she said.

"And part of the [economic stimulus] comes through higher house and stock prices, which causes people with homes and stocks to spend more, which causes jobs to be created throughout the economy and income to go up throughout the economy."

This is Economics 101, a child's guide to how the economy works. But what if she is wrong?

In spite of her brave words, all is not well in the world's biggest economy, particularly in the growing imbalances between capital and labour and between the rich and the poor.

Recent research also calls into question the assertion that lower interest rates will have a positive effect in inducing greater investment.

Economists on the research staff of the Fed studied information and returns from hundreds of US companies and found that their investment plans were quite insensitive to interest rates. Most companies wouldn't invest more if long-term rates were lower and the majority wouldn't invest less provided that the rates were not more than 3 per cent higher.

The December US jobs figures, however adjusted, showed as Lee Adler headlined his report in The Wall Street Examiner, the "Big picture employment trend remains crappy".

He continues: "While Wall Street and the fortunate 20 per cent of the American people who own 92 per cent of the stocks outstanding gorged on manna from the Fed, in 2013, the growth rate in the number of full-time employed people actually fell from around 2.5 per cent annually to less than 1.5 per cent annually.

"Cheap money has encouraged speculation, stock buybacks, malinvestment, and overinvestment in technologies and capacity that eliminate jobs and reduce the value of human labour in the marketplace."

Profits as a share of US GDP have risen from less than 4 per cent in the mid-1980s to a post-war peak of 11 per cent last year. As John Plender wrote in the Financial Times, this is "a statistic that would gladden the heart of a 19th century robber baron".

The McKinsey Global Institute estimates US companies have enjoyed a cumulative interest rate windfall of US$310 billion since 2007, which increased profits by 5 per cent.

Yellen also has to face the fact that part of the explanation for the decline in the unemployment rate is that people have just dropped out of the labour market. Another dismal statistic is that 40 per cent of the unemployed are long-term unemployed with little hope of finding a job.

All those who know her say that Yellen sees unemployment not just in terms of opportunities lost for the economy but also in terms of opportunities lost for the individuals.

Her first statement after President Barack Obama nominated her was to say that although the US had made progress, it still has a long way to go, and the Fed's role was not just to keep the dollar sound but "to serve all the American people … [and] ensure that everyone has the ability to work hard and build a better life".

But she may find the levers she can use for this are too limited for the job.