Fed letter: Uncertainty fueled jobless rate
Nina Ohakam, of Islandia, searches job postings at the Suffolk County One-Stop Employment Center in Hauppauge. A report says uncertainty has elevated the jobless rate. (Sept.6, 2012) Credit: Steve Pfost
Uncertainty over the economic outlook has added between one and two percentage points to the U.S. unemployment rate since 2008, according to an estimate from the San Francisco Federal Reserve Bank.
The finding, published Monday in the regional Fed bank's latest Economic Letter, quantifies for the first time the drag that uncertainty has had on the economy since the Great Recession.
"Had there been no increase in uncertainty in the past four years, the unemployment rate would have been closer to 6 percent or 7 percent than to the 8 percent to 9 percent actually registered," wrote San Francisco Fed research advisers Sylvain Leduc and Zheng Liu.
The Fed sent short-term interest rates to zero in December 2008 to counter the deep recession, and bought trillions of dollars of bonds to further lower long-term interest rates.
But unemployment has remained stuck above 8 percent a full three years after the start of recovery. Last week the U.S. central bank embarked on a fresh round of bond-buying, saying it will not stop the purchases until it sees substantial improvement in the job market.
The research published Monday offers empirical evidence that uncertainty has indeed deepened the recession and slowed the recovery, elevating the jobless rate despite the Fed's efforts to bring it down.
It does not suggest that monetary policy is helpless in the face of uncertainty, but only that its ability to counteract uncertainty is limited when rates are already near zero.
Uncertainty acts on the economy like a drop in overall demand, holding back economic activity and inflation at the same time, the researchers found. It is not always a factor in recessions: It played almost no role in the 1981-1982 recession or the recovery that ensued, the same research showed.
When it does come into play, policymakers are usually able to offset the economic drag the same way they counter a drop in demand, by lowering interest rates.
During the recent recession they were unable to do so because interest rates were already near zero.
Chairman Ben Bernanke has acknowledged that uncertainty has kept firms from hiring, and has said the Fed should continue doing what it can to help.
