The Fed does not affect unemployment


B. Bernanke gave a talk yesterday. We presented quite a few arguments (e.g. here) why the Fed cannot control inflation with all instruments like rates and QEs. Here we present a simple case showing that the Fed does not affect the rate of unemployment as well. Comparing three recent trajectories of unemployment fall after it peaked. The dry residual is that nothing has changed with the negligible overnight rate and the money poured into the system.  Literally, there is no reaction at all.  

The rate of unemployment, u, was very high (10%) in 2009. It was recognized by the Fed and economic community that the fall in this rate is too slow historically and the Fed has to take some immediate measures to expedite the reduction to, say, 6.5%. Such measures were taken.

Figure 1 shows the evolution of u since 1980. There were two major peaks in 1982 (10.8%) and 1992 (7.8%). (All rates are seasonally adjusted.) Let’s compare the fall trajectories. When the troughs preceding the peaks are synchronized all three descending curves look very similar. This observation says that the current fall in u is not different from the previous. With or without QE, unemployment falls at the same rate.

It also tells us a fairy story about the near future. This rate will fall into the second half of the 2010s. Meanwhile, it may fall to 6.0% in 2013 or in the first half of 2014.


Figure 1. The rate of unemployment in the US 

Figure 2.  Two previous major peaks synchronized with the most recent. The length of fall is approximately 7 years.

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