Could the Fiscal Impasse Kill Job Growth?

Federal Reserve

Is the Federal Reserve Bank of San Francisco signaling that it wishes to see changes to U.S. monetary policy? The bank released a letter, dated October 15, containing a report using indicators to predict the future state of the U.S. labor market.

The San Francisco Fed found improvements across six areas that are marks of continued improvement. The letter comes two weeks ahead of the next meeting of the Federal Open Market Committee (FOMC), during which the Federal Reserve will have another chance to end its program of quantitative easing.

The Fed was expected to begin tapering — the easing of the rate at which mortgage-backed securities and Treasury bonds are purchased by the U.S. government — in September. The minutes from the September 17-18 meeting, released by the Fed on Wednesday, show that participants who were against tapering were worried an “announcement of a reduction in asset purchases at this meeting might trigger an additional, unwarranted tightening of financial conditions.”

The Federal Reserve Bank of San Francisco begins its letter by referencing this policy and its inception in September 2012.  The letter notes that policymakers decided the market needed substantial improvement before the Fed would change course. In other words, an enhanced outlook is necessary before the Fed can end buying mortgage-backed securities.

In the letter, the San Francisco Fed outlined six indicators that help predict the future unemployment rate: the insured unemployment rate, initial claims, capacity utilization, jobs gap, ISM manufacturing Index, and payroll employment growth. The bank arrived at these gauges after examining more than 30 others, crunching data from January 1978 to mid-2013.

The organization prefers evaluating these indicators because of their potential to see future trends. This differs from existing data, the San Francisco Fed explains, because those ”studies have focused on coincidental measures that capture the current state of the labor market or the current rate at which conditions are improving.”

The data came from a variety of sources, something the bank took into account, normalizing each set relative to the whole. This also allowed the bank to chart the indexes and measure how many standard deviations away from the average each was over a period of time. All experienced an increase at the start of the Great Recession. Payroll unemployment jumped the highest, at more than four standard deviations above the norm. Since then, each has begun to normalize to the historical average.


The San Francisco Fed’s report concludes that the pace of recovery has been modest and the toll of the recession immense. However, based on the identified barometers, “the recovery has more momentum now than a year ago. This is a strong signal that labor market improvement will continue at their current modest pace, and could even accelerate in the coming months,” according to the report. The bank leaves it for policymakers to determine “whether this increase in momentum amounts to a ‘substantial improvement.’”

This view was also represented at September’s FOMC meeting. Rather than looking at the present picture and performance as main indicators, some participants “highlighted what they saw as meaningful cumulative progress in labor market conditions since the purchase program began.”

There is one other factor that will likely be weighing large in the minds of FOMC participants during the October meeting, the U.S. government shutdown, and the debt-ceiling debate. It’s a debate that ratings agency Fitch says “risks undermining confidence in the role of the U.S. dollar as the preeminent global reserve currency, by casting doubt over the full faith and credit of the U.S.” — if the U.S. fails to pass a debt-ceiling increase and defaults on obligations, the agency will downgrade the U.S.’s rating from AAA to B+.

The inability to pay debts and a downgrade in credit rating and international standing would likely overshadow improved and improving labor market conditions.

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