Kristina Hooper, CFP®, CIMA®, is US head of investment and client strategies for Allianz Global Investors. She has a B.A. from Wellesley College, a J.D. from Pace Law and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.
The global financial crisis has been dramatic, painful and a huge setback for both employment and equities. Yet while the US economy is still recovering, jobs and stocks are finally making their comebacks—nearing or surpassing significant milestones—and they largely have the Fed to thank.
The Dow Jones Industrial Average hit four consecutive highs the week of Mar. 4, reaching an all-time high of 14,397.07 on Mar. 8. That same day, the S&P 500 Index, a broader measure of stock-market performance, closed less than 15 points short of its Oct. 9, 2007, all-time high of 1,565.15.
The unemployment rate also delivered good news last week, reaching 7.7% for the first time since December 2008, while non-farm payrolls dramatically outpaced expectations with a net gain of 236,000. In addition, the four-week moving average for jobless claims—a key labor metric—fell to a five-year low; it dropped 7,000 and reached 348,750 for the week ended March 2, its lowest level since March 2008.
The employment milestones are not entirely surprising. After all, the Fed is one of only a small number of central banks with a dual mandate to “promote a return to maximum employment in the context of price stability”; most central banks are only charged with the latter. The Fed has flooded the US economy with monetary stimulus for more than four years, and in 2012 went so far as to specifically state that it would hold interest rates at historically low levels until the unemployment rate falls below 6.5% or inflation rises above 2.5%.
Interestingly, Fed Chairman Ben Bernanke recently felt he had to make the case that the Fed’s monetary policies have been working. At his Jackson Hole speech in Aug. 2012, he cited a study that found that, as of 2012, the first two rounds of quantitative easing “may have raised the level of output by almost 3% and increased private-payroll employment by more than two million jobs, relative to what otherwise would have occurred.”
Still, monetary policy is more hammer than scalpel. Artificially low interest rates alone can’t trigger an economic recovery, and while it’s encouraging to see the unemployment rate at a level not seen since 2008, the jobs recovery has been slow and imperfect. Consider the facts:
- With tight credit standards and millions of “under-water” homeowners, today’s low borrowing costs are unavailable to many consumers—dulling the effectiveness of low rates.
- Companies are still cautious about hiring; while much-improved, today’s 7.7% unemployment rate is far above the 30-year average of 6.25%.
- The recent unemployment improvement was partially due to a drop in the employment participation rate, which fell to 63.5%.
- Some of February’s non-farm payroll strength was offset by downward revisions for January; the 3-month average payroll growth rate is now a more tepid 191,000.
- The percentage of jobless unemployed for 27 weeks or more—the “persistently unemployed”—reached 40.2% in February vs. 38.1% in January.
- The average duration of unemployment increased to 36.9 weeks from 35.1 weeks.
- Unemployment is highest among those without a high-school diploma at 11.2%; fiscal policies targeting job training may help them more than easy Fed money.
But the Fed’s accommodative stance is clearly helping the stock market, which has seen a more-rapid recovery than jobs. It’s understandable why, given the Fed’s actions, the Dow and S&P are in record-setting territory. By instituting financially repressive policies that may last for years, the Fed is trying to achieve its mandates while inflating away public debt and pushing investors out on the risk spectrum. Stocks, which offer positive real returns and in general have better fundamentals than they did five years ago, have benefited the most from all this easy money.
So if you’re an equity investor, you can thank our central bank for pushing stocks into record-setting territory—but if you’re a job-seeker, you might not be in such a celebratory mood. Clearly, some records are easier to break than others, but it’s the Fed that’s making it all possible.
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