After Friday’s disappointing update on the labor market in December, the debate about how to boost employment will take on an even greater import, if that’s possible, in the months to come. All the more so as this is a mid-term election year.
Inextricably intertwined in the debate over jobs is the question of when to raise interest rates. The two primary goals: nipping any future inflationary pressures in the bud without derailing the economy’s still-weak capacity for minting new jobs.

Suffice to say, it may be impossible to find a productive solution that a) promotes job growth; b) keeps future inflation sufficiently contained for the long haul; and c) keeps the political powers that be in a satisfied state. Ideally, there’s a compromise that offers some degree of satisfaction on all three. But juggling this trio isn’t going to be easy. That’s partly because quick and easy answers aren’t forthcoming. It’s primarily a question of deciding which leg of the stool will suffer the most. Meantime, there’s lots of debate. Here’s a selection in recent days:
—Yardeni Research, Jan 11, 2010 (subscription required)
…the Democrats passed a program last February that had paid out only 33% of the $787bn appropriated for the job of creating jobs as of the end of last year, according to the administration’s official recovery.gov website. Of the $257bn spent so far, more than a third was for entitlements. The rest was tax benefits, contracts, grants, and loans. The website claims that 640,329 jobs were created by this program as of the end of October. If we generously assume that one million jobs were created last year by the program, that would amount to $257,000 per job!
There must be a more cost-effective way for the government to create jobs. There is indeed: Let the private sector do it without so much government meddling in the economy and such large deficits. This seems to be the increasingly conservative opinion of more and more voters, according to the major national polls. During December, according to Gallup, 40% of American claimed that they are conservatives. That’s the highest on record for this annual survey, which started in 1992.
–David Kotok, Cumberland Advisors, Jan 11, 2010.
To be blunt: in our view the jobs data were plainly miserable and disappointing. Like many of our readers, I listened to the debate on CNBC and read numerous analyses. We will set aside the perennial optimists who find positive outcomes in any data set. Simply put: a 10% unemployment rate and a 17.3% underemployment rate are two extremely serious numbers.
They help explain the market’s immediate reaction, which was a Treasury bond price rally and a drop in the 2-year note yield to an intraday low of 0.936%. The 2-year note yield under 1% is a very important figure for market watchers. It is a key market-based pricing of expectations for the Federal Reserve’s interest-rate policy. This reaction essentially suggests that the Fed will maintain the policy-setting Federal Funds interest rate range of 0.0% to 0.25% for at least the first half of 2010.
That has been Cumberland’s expectation for some time. The assumption of a very low US interest-rate policy continues to drive our investment decisions as we conduct stewardship over portfolios through these extraordinary times. Talk about an imminent exit strategy by the Fed is just talk. It is quite possible that the Fed will maintain the zero-bound rate for the entire year. Maybe, they will firm the rate to 0.25% instead of a range this summer. Our longer-term estimate is that we will not see the Fed Funds Rate above 1% until 2011 at the earliest.
–Gary Burtless, The Brookings Institute, Jan. 8, 2010.
The latest employment report shows that the nation’s job market continues to make a painfully slow recovery from the worst labor market downturn since the Great Depression…
Both the labor force participation rate and the employment-population ratio reached low points we have not seen since the mid-1980s. Although the number of newly laid off workers was considerably smaller than the numbers we saw earlier this year and late last year, unemployed workers face a very grim job search. The average duration of unemployment spells set an all-time record in December. Unemployed workers have now been jobless for more than 6½ months, a record high.
The payroll employment, hours, and wage data reported in the employer survey are a bit more heartening. Payroll employment fell 85,000 in December after remaining essentially flat in November…
The good news is that hours worked in the private sector remained above the level we saw last summer. Hourly wages continue to inch up, although very slowly.
–BCA Research, Jan. 6, 2010
Economic cycles associated with financial traumas such as banking crises or asset price collapses tend to have deeper downturns and weaker upturns. The current uptrend in U.S. economic growth should be sustained, but the rebound will remain subdued compared to recent recoveries.
–Asha Bangalore, Northern Trust, Jan. 8, 2010
The details and tone of the December employment report indicate that labor market conditions remain bothersome. A meaningful pace of hiring is unlikely in the next few months given the structural unemployment in the economy, the shortened workweek, and large number of part-time workers. In other words, the December employment report reinforces expectations of the FOMC on hold in the near term.
The FOMC will need to ensure that a self-sustained economic recovery in underway before it can tighten monetary policy and justification for its actions in the current politically charged environment has to be rock solid. Therefore, the Fed is unlikely to undertake a reduction of monetary accommodation until the unemployment rate has peaked. In the jobless recoveries following the 1990-91 and 2001 recessions, the Fed waited it was abundantly clear that the unemployment rate had peaked before implementing a tightening of monetary policy, despite gains of real GDP for several quarters.