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Official: Job woes drive Fed action
The No. 2 at the Federal Reserve mounted a defense of the central bank's controversial policy moves Monday, calling them essential to fight against the remarkable damage done to the jobs market by the Great Recession.
Janet Yellen, vice chair of the Fed's board of governors, painted a bleak picture of the still-weak labor market and used it to underline the extreme steps the Fed has taken since the economic collapse.
"The gulf between maximum employment and the very difficult conditions workers face today helps explain the urgency behind the Federal Reserve's ongoing efforts to strengthen the recovery," she said at a Washington conference. "My colleagues and I are acutely aware of how much workers have lost in the past five years. In response, we have taken, and are continuing to take, forceful faction."
In her remarks, Yellen sought to put a human face to the struggles of the unemployed, and in turn to use that hardship as a way to explain why the Fed has taken on such a significant role.
While the U.S. is now years away from the worst of the recession, the unemployed are still struggling with a labor market Yellen described as the worst of a generation. She pointed out that during the worst of the economic downturn of the 1980s, the median length it took someone to find a job was 12 weeks. Since the Great Recession, the median has averaged 20 weeks, and now stands at 16 weeks.
And while the unemployment has slid in recent months to 7.9 percent, that is still higher than any point in the 24 years before this latest recession. That rate also does not include 800,000 discouraged workers who have given up the job hunt, or the 8 million working part-time when they would prefer to work full-time.
"These are not just statistics to me," she said. "We know that long-term unemployment is devastating to workers and their families … The toll is simply terrible on the mental and physical health of workers, on their marriages and on their children."
She warned it would be "years" for some workers to feel like they have returned to their status before the collapse.
Facing the significant employment woes, Yellen defended the Fed's recent steps to boost the economy. Recently, the Fed took the unprecedented step of identifying specific targets on unemployment and inflation that would indicate when the Fed would consider boosting interest rates. So long as the jobless rate remains above 6.5 percent and inflation under 2.5 percent, the Fed would expect to keep rates low. But Yellen emphasized that these numbers are not "triggers" for action, but simply thresholds for possible action.
In an attempt to explain why this recession has been so difficult to shake loose, Yellen pointed in part to fiscal policy coming from the government. Other than a brief influx of stimulus during the worst of the crisis, Yellen said the direction of the nation's fiscal policy has done more to restrain the recovery than support it. With an ailing economy, state and local governments cut spending and hiked taxes to deal with budgetary shortfalls, while the federal government have turned its focus to reducing deficits. While relieved that Washington found a way to avert a "fiscal cliff" that would have pushed the U.S. back into a recession, Yellen said she expects fiscal policy "will continue to be a headwind for the recovery for some time."
The dramatic and lengthy downturn in the housing market, coupled with turmoil in Europe, has also contributed to the long-running slowdown, she said.
Another threat to the economy could be the unemployment rate itself if it lingers at a high level, she warned. The longer workers remain unemployed, the more likely their skills and contacts will wither, making it that much harder for them to return to productivity.
But despite all the doom and gloom, Yellen opted to close her remarks on a positive note.
"The job market is improving," she said. "The progress has been too slow, but there is progress."
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