Fed to Play Lesser Role

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    There are two ways to end a recession.  One is to increase federal spending on the theory that people will spend more money when they have more money.  Obviously this Congress doesn’t care about economic stimulation.  They’ve cut budgets, not raised them.  They failed to pass the jobs bill that President Obama proposed a year or so ago.  They’ve cut the food stamps program.  They closed the government down, causing millions economic hardship and caused others to carefully hold onto their funds, saving as opposed to spending.  One might say that the Congressional failure to stimulate the economy has contributed to the length of the recession.

    The Federal Reserve Bank has picked up some of the slack, buying $85 billion of bonds each month to put money into the economy.  Some economists do not agree with the Fed’s action because it has artificially kept inflation down.  Without the bond purchases, they argue, inflation would rise, and reflect the true value of goods and services. Without increased inflation, some businesses are holding onto cash instead of investing it, and others are adversely impacted.

    Now, on reports that the economy is improving, the Fed says it will “taper” off their stimulus.  Their tapering will not be a major shock to the economy.  Instead of buying $85 billion of bonds each month, they’ll buy $10 billion less, or $75 billion.  Why?  They say a robust jobs report this month, with the unemployment rate at its lowest level in 10 years  – 7 percent – suggests the job market is on the mend.  Economic growth is higher, too, at 2.8 percent.

    The Fed fails to consider the fact that the unemployment rate looks better because of the number of people who have dropped out of the labor market.   If those people continued to look for work, the rate might be as high as it was last month.  Furthermore, when you look at alternative measures of unemployment, the overall rate is 13.2 percent, the same as it was last month.  The alternative report says that Black unemployment is 12.5 percent, but if it is extrapolated, that rate is 24 percent, or one in four African Americans.  Some find this a low estimate based on their experiences with the African American population, especially those with lower-paying occupations.  In any case, the unemployment rate for African Americans is entirely too high, and “economic recovery” has not trickled down.

    What does Federal Reserve tapering mean to you?  If you are in the stock market (African Americans 35 percent less likely than Whites to be in the stock market) you realized record gains next are far more likely to see the value of your portfolio rise in the short run.  On the other hand, stock values are likely to correct (maybe fall) in the first quarter of 2014.  Rising interest rates will also mean (in a year or so) that you’re the value of CDs and other interest-dependent investments will slowly increase in value (now you are getting between one and one and a half percent.  On the other hand, as interest rates rise, the value of bonds will drop.

    What about unemployment?  If those holding dollars invest them, unemployment will drop slowly.  We still have excess unemployment – the unemployment rate was about 5 percent at the beginning of the recession.  We lost nearly a million jobs a month at the beginning of the recession, and in the past several months, we have gained about 300,000 jobs a month.  It may take until 2015 to return to the level of employment from 2008 or early 2009.

    In addition, in some occupations, the level of technological change has been rapid, and machines are doing the work that people once did.  Furthermore because of the recession, some employers have found that they can make do with fewer employees.  For example, we have seen drops in clerical employment as managers use computers more.  In some offices as few as one or two employees do the work that half a dozen did just three years ago.

    While investors are applauding the Fed move, workers should be wary of the “tapering” that will pull $10 billion a month from the economy.  African American workers, especially, will be hit harder than others by these changes.  Improved economy?  For whom?

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