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Fed fears it may have been too successful at whipping US unemployment

September 13
10:15 2018

U.S. Federal Reserve officials tout a decade of falling unemployment as among their major victories in fighting the economic crisis of 2007 to 2009.

Now they are beginning to worry they have been too successful. When unemployment falls as low as it is currently, Boston Federal Reserve bank President Eric Rosengren said in a new paper released Thursday as part of a review of Fed policy, recession has inevitably followed, with the central bank showing no success in fine-tuning the economy to a stable rest at full employment.

Policy forecasts have often projected such a “soft landing,” he noted, and with unemployment at a near two decade low of 3.9 percent the hope has risen again.

But since World War Two, periods in which joblessness has fallen below the estimated “natural” rate of full employment inevitably have been followed by a recession, with only a half a percentage point rise in the unemployment rate needed to kickstart the slide. The current estimate of “full employment” is around 4.5 percent.

“The recurrent pattern was one where the tightening of monetary policy was expected to slow the economy down gently…to full employment,” Rosengren and three Boston Fed co-authors noted. But “Once the unemployment rate starts to rise by a relatively modest amount, dynamics take hold that tend to push the economy into a recession.”

“The empirical record of policymakers’ ability to engineer a growth recession that nicely lands the economy at full employment without morphing into a full-blown recession is not comforting.”

Rosengren used his remarks to advocate the Fed regularly review its policy “framework” by conducting a systematic review of what is working and what is not at regular intervals rather than adapting to events on the fly as has been more typically the case. The Bank of Canada for example conducts such a review every five years.

But his comments about the inability of the Fed to sustain long periods of low unemployment without a follow-on recession reflect a spreading sense among U.S. central bankers that the economic landscape may be shifting under their feet.

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