Last week, Fed chief Ben Bernanke announced that election run-up easing — known as QE3 — was just not enough and tweaked the twist again like he did last summer, adding another $45 billion a month to his buying binge.
That $45 billion is on top of the $40 billion he is already on the hook to buy in mortgage-backed securities from Fannie Mae and Freddie Mac.
But instead of saying his zero-interest rate policy and buying program would extend into the year 2525 (if man can still survive), he announced the Fed’s printing press will run until the jobless rate hits 6.5 percent.
The Fed will use an unemployment rate that is more inaccurate now than it has been at any time in the past. It grossly underestimates the problem.
The Fed must be aware of this, so it is alarming that it would marry itself to it. Each month, as more people give up hope of finding a job and drop out of the actively looking category, the jobless rate actually falls.
The labor-force participation rate has been plummeting to new lows — not seen since under Jimmy Carter in 1978 — to 63.6 percent.
In fact, it has been the largest driver of the mysteriously falling unemployment rate. That trend alone could get us to 6.5 percent all on its own next year.
It is disconcerting for the Fed to bind itself to any one economic statistic, let alone one so obviously flawed like the jobless rate. But if the Fed were so inclined, it should have wedded its actions to the purest of economic numbers: gross domestic product growth.
GDP is essentially an economy’s truest reflection. The number is beyond economic reproach because it is math-based and not a government economic assumption like the unemployment rate.
Yet despite the Fed’s pledge to expand its balance sheet by almost $1 trillion in 2013, to $5 trillion, ironically the market reaction saw it as a tightening: Bonds, gold and stocks all got shellacked after the announcement. Go figure.