Minneapolis Fed: Job Market Unaffected by Monetary Policy
Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, spoke Tuesday on behalf of the Federal Open Market Committee (FOMC), harping on the troubling implications of the job market and saying unemployment isn't something monetary policy can fix. The unemployment rate, as Kocherlakota explained, has a direct relationship to the job-opening rate which is tracked by the US Department of Labor's Bureau of Labor Statistics. When job openings rise, the unemployed can find jobs more readily and thus drive down unemployment. Kocherlakota said the inverse relationship, a decrease in job openings to an increase in unemployment, was "extremely stable" during the 2000/2001 recession, the subsequent recovery, and throughout the early part of the current recession. However, he said that stable relationship began to disintegrate in 2008 and over the past year completely shattered. Between July 2009 and June 2010, the job openings rate increased 20%, but the unemployment rate actually increased slightly during this period. "What does this change in the relationship between job openings and unemployment connote? In a word, mismatch," Kocherlakota said. "Firms have jobs, but can’t find appropriate workers. The workers want to work, but can’t find appropriate jobs." As of August 11, the current job-opening rate is 2.2%, according to the Bureau of Labor Statistics. Kocherlakota said unemployment should be closer to 6.5% at that rate and under a stable relationship relative to job fillings rather than the current 9.5%. Kocherlakota suggested many things as the cause to a mismatch in the job market -- geography, skills, demography -- but said the problem is one the Fed can't do anything to fix. "Monetary stimulus has provided conditions so that manufacturing plants want to hire new workers. But the Fed does not have a means to transform construction workers into manufacturing workers," he said. "Most of the existing unemployment represents mismatch that is not readily amenable to monetary policy" Once again last week, the FOMC kept the federal funds rate between 0% and 0.25%. This means it is planning to keep short-term interest rates relatively low as an effort to sustain unemployment at the current level. "The FOMC is saying: We’re keeping interest rates low to keep unemployment from going any higher," explained Kocherlakota. "And we feel safe in doing so because there seems to be little threat of inflation." Write to Christine Ricciardi.