High jobless rate streak could break '80s record

Job Fair - photo: Mark Wilson/Getty

Paul Davidson
USA TODAY

Not since the early 1980s has the nation's unemployment rate been so grim for so long, a government report due Friday is likely to show.

Many economists predict the report will say that November's jobless rate held steady at 9.6%, making it the 19th consecutive month that the unemployment rate was above 9%. That breaks the post-World War II record set in the 1980s recession.

The dubious milestone shows that even if job growth picks up as expected in coming months, progress will be slow, and it will take years to put a big dent in the unemployment rate.

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Bernanke: Long-Term Unemployment Has SEVERE 'Social Consequences'

Kristina Cooke
Reuters

NEW YORK -- Federal Reserve Chairman Ben Bernanke warned on Tuesday that a long period of high unemployment could exact a steep social cost, as he and other Fed officials defended the central bank against criticism of its easy money policy.

Minneapolis Fed President Narayana Kocherlakota said the Fed's controversial bond purchase program was needed given a "troubling" slowdown in U.S. economic growth and too low inflation and employment.

The Fed said earlier this month it would buy $600 billion in Treasury bonds to support a weak economy. Core inflation has averaged well below the Fed's informal target of about 2 percent and the jobless rate remains stubbornly high.

"There are obviously very severe economic and social consequences from this level of unemployment," Bernanke said at Ohio State University. "So getting new jobs, getting unemployment down is of an incredible importance."

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Volcker calls Fed plan an "illusion", won't boost economy

Kelly Olsen
Associated Press

SEOUL, South Korea — Former Federal Reserve Chairman Paul Volcker says the U.S. central bank's plan to buy hundreds of billions of dollars in government bonds probably won't do much to boost the economic recovery.

The Fed announced Wednesday that it would purchase $600 billion in Treasurys, aiming to lower long-term interest rates in an effort to spur spending and ultimately lower the U.S. unemployment rate, currently at 9.6 percent. The move comes on the heels of previous purchases of $1.7 trillion in mortgage and Treasury bonds.

Volcker told a business audience in Seoul that the Fed's bond plan is obviously an attempt to spur the U.S. economy but "is not the kind of action that's likely to change the general picture that I've described as slow and labored recovery over a period of time."


The Fed's move has caused worries in South Korea and other emerging markets in Asia. Those governments fear that lower interest rates in the U.S. will further push investors to seek higher returns overseas and that this tide of money will drive up their currencies and destabilize their markets.

Volcker served as Fed chief from 1979 until 1987 under presidents Jimmy Carter and Ronald Reagan and is currently chairman of President Barack Obama's Economic Recovery Advisory Board. He also warned that the U.S. won't find its way out of the economic doldrums through over-stimulation.

"The thought that you can create a prosperous economy by inflating is an illusion, in my judgment," he told reporters after his speech. "And we should never forget that. I thought we'd learned that lesson and I hope we continue to learn that lesson."

The Fed faces a dilemma in balancing the aim of boosting the economy now while avoiding fears of a future jump in inflation due to the monetary stimulus, said Volcker, who as central bank chairman hiked interest rates aggressively to tame inflation.

"The influence of this kind of action on longer term interest rates, in particular, is ambiguous because the immediate impact of buying bonds ought to be to drive bond prices up and interest rates down," he said. "But if people get concerned about longer run inflationary impacts, the effects go in the other direction."

In theory, the Fed's action is expected to lower interest rates because bond prices and interest rates – also known as yields – move in opposite directions. The yield is the fixed amount of annual interest paid to the owner of the bond expressed as a percentage of the bond price, so the extra demand created by the Fed's purchases should push bond prices up and lower the yield.

But when investors fear inflation will be higher in the future they demand that bonds pay a higher interest rate to protect their investment from the value-eroding effects of inflation.

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The Fed's 'pact with the devil' now the only stimulus game in town

Dees Illustration

Tom Raum
Associated Press

WASHINGTON — Any more stimulus spending by President Barack Obama and Congress is dead, after this week's election blowout by the Republicans. Yet, Federal Reserve Chairman Ben Bernanke's "Hail Mary" pass to pump $600 billion into the banking system is really stimulus spending under another name.

The Fed won't be spending taxpayer money or borrowing from China. It will be doing the electronic equivalent of creating dollars out of thin air. The central bank will then use the new money to buy longer-term government bonds. The Fed's plan will initially increase the supply of dollars held by banks, hopefully spurring more lending.

If all goes according to Bernanke's script, the bond purchases – $75 billion a month for eight months – should force down yields, taking with them interest rates for homeowners, consumers and businesses. It should also help make U.S. goods more competitive overseas and keep alive a stock market rally that began in August.


All of that should boost economic growth, help the ailing housing market and encourage more hiring.

It may not work. And there are risks.

Printing so much new money could lead to runaway inflation down the road. Lower interest rates could also produce speculative bubbles in the price of oil and other commodities and in risky high-yield investments. It could also take pressure off the White House and Congress to confront the long-term deficit crisis.

Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City, calls it "a pact with the devil." He was the only dissenter in the Fed policy committee's 10-1 vote for the Fed effort, also known as quantitative easing.

The bold move – carefully choreographed since last summer – came as the central bank was starting to run out of arrows in its quiver. Its main weapon for revving up or slowing down the economy is adjusting short-term interest rates. But, given the magnitude of the downturn, the Fed has held those rates at near zero since December 2008.

Fed leaders figure the $600 billion bond-buying program will provide a modest boost to the economy over the next year, but they acknowledge that the jobless rate, now at 9.6 percent with nearly 15 million unemployed, will stay high. And it could even rise in the next few months.

It is the Fed's second experiment with buying bonds on the open market. From December 2008 to this past March, it bought $1.7 million in Treasurys and mortgage-backed securities. But since then, the recovery has faltered.

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