Fed must stick with jobs mandate

At long last a woman has taken the helm of the world’s most powerful central bank.

Too bad this historic appointment comes when monetary policy, the chief weapon central banks wield to regulate economies, has all but lost its effectiveness. While there’s never a bad time to take a whack at the glass ceiling, I fear Barack Obama’s appointment of Janet Yellen to succeed Ben Bernanke as Federal Reserve chair may prove inopportune.

Yellen’s skills are impeccable. A gifted labour economist, she was most recently the Fed’s vice chair, ran one of its district banks, and chaired the Council of Economic Advisors in Clinton’s White House. She had the courage to admit she’d misjudged the severity of the housing bubble when confronted by the Financial Crisis Inquiry Commission in 2010.

And she’s fully aware the economy she’s inheriting is vastly different from the ones managed by Bernanke’s two most recent predecessors. Right now, the ratio of money and quasi money to U.S. GDP hovers around 90%—the highest in history, and well above the 62% to 79% range during Alan Greenspan’s tenure and the 70% to 79% range Paul Volcker presided over as Fed chief.

The 90% ratio suggests manipulating the Federal Funds Rate will be of little use to a central bank that’s now mandated to push unemployment below a 6.5% target. With interest rates near rock bottom, that scenario left Bernanke relying on quantitative easing (further tapering of which is now delayed) and checking his watch for his hour of departure from Washington.

That hour’s arrived, and his successor now faces maligning at the hands of Tea Party and some mainstream Republicans, who call her a dove who’ll tolerate inflation in exchange for getting people back to work.

So be it. The Fed’s current unemployment target, a half percentage higher than the goal Greenspan set to pull out of the ’90s downturn, must be hit. It is the spending of ordinary people, after all, that truly supports an economy. Further, recent Pollara polls show a large percentage of the populace still thinks we’re in a downturn.

While official numbers say the worst is over, statistics don’t capture everything. Regular folks act on experiences and anecdotal evidence—and what they see are friends who are unemployed, or who can’t find better jobs. They see factories or other employment centres closing.

So, while the economy’s okay on paper, the fact remains that people who perceive a soft economy are tighter with their cash. And they’re less likely to invest. The kind of grassroots-level change they want to see can only be brought by a central bank mandate placing employment opportunities first.

Yellen’s best asset is that she’s extraordinarily smart; I’ll wager smart enough to find new tools to guide the economy of Canada’s largest trading partner back to meaningful growth. After all, the best and brightest make their own histories, rather than becoming mired in messes they inherit.

by Philip Porado, a financial columnist based in Toronto. phil.porado@gmail.com