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Economists are increasingly anxious that the 9.1% jobless
rate in the United States could become entrenched, as the skills of those out
of work atrophy and their connections to the job market wane, sidelining them
and chipping away at the US economy's capacity to produce.
"The Fed is doing all that it can to stimulate the
demand side of the economy in an environment where 'all that it can do' is 'not
very much'," said Mark Setterfield, an economics professor at Trinity
College in Hartford, Conn.
He is the author of a book on persistently high unemployment, sometimes known as hysteresis.
The term is borrowed from physics, where it is used to
describe a temporary effect that becomes permanent, even when whatever
triggered the initial effect is removed. In the labour market, it is used to
described a self-feeding cycle where even after demand returns, unemployment
remains high.
"We went to 9% unemployment quite quickly, and we have
basically been stuck there," Setterfield said. "There has to be the
concern that that type of hysteresis effect is going to add insult to
injury."
The Fed on Wednesday moved to offset what it called
significant downside risks to the already weak US economy with a new $400bn
programme to weight its $2.85 trillion balance sheet more heavily towards
longer-term securities.
Do the twist
The idea behind the move, nicknamed by investors as
Operation Twist after a similar policy in the 1960s, is to push down long-term
borrowing costs to encourage mortgage refinancing and consumer and business
borrowing.
The Fed also sought to give the housing market a direct
boost by promising to keep its mortgage-backed securities portfolio at its
current size.
But with unemployment so high, households worried about
their future prospects may be more focused on paying down debt than taking out
new loans.
If that sucks enough demand from the economy, economists
such as Setterfield argue the jobless rate will level off at a high level, no
matter how low the Fed pushes interest rates.
Several analysts left their economic forecasts unchanged
after the Fed's move. An estimate from Goldman Sachs made ahead of the meeting
put the economic impact of a "twist" operation at just 0.5 percentage
points of added growth, and a reduction in the unemployment rate of just
one-tenth by 2015.
Even the Fed does not know exactly what to expect; how much
of an economic boost the programme will deliver is, as the central bank
explains on its website, "difficult to estimate precisely".
But such concerns probably will not prevent the Fed from
doing even more if need be, said Eric Stein, a portfolio manager at Eaton Vance
in Boston.
"I think (Fed chairperson Ben) Bernanke and (New York
Fed president William) Dudley and (Chicago Fed president Charles Evans) and
(Fed vice-chair Janet) Yellen are committed to doing whatever it takes to get
the economy going," he said.
"I think they'll continue pushing for things unless the
world gets materially better - I don't know what efficacy things will have, but
I think they will keep pushing."
Bernanke has repeatedly cited sustained high unemployment as
a chief concern. In its statement following Wednesday's policy-setting meeting,
the Fed pointed to an "elevated" jobless rate that will decline only
gradually.
"Chairman Bernanke may be... over-optimistic, in the
sense that he is thinking about unemployment coming down slowly and
painfully," said Laurence Ball, an economics professor at Johns Hopkins
University.
That concern is not limited to academics.
San Francisco Federal Reserve Bank president John Williams,
who rotates into a voting spot on the Fed's policy-setting panel next year,
recently raised the spectre of permanently high unemployment outside a
recession, something unseen in the United States since the end of World War II.
"One of the concerns is, if unemployment stays very
high for very long, people are out of work for several years, that's going to
have a much more persistent effect, despite the history," Williams told
reporters after a speech in Seattle in which he suggested there was more room
for the Fed to ease monetary conditions.
While the Fed wants to bring down the unemployment rate,
many economists say that it has little chance of success as long as politicians
fail to deliver fiscal stimulus or effective jobs-promoting programmes.
That's the argument made by Dallas Fed president Richard
Fisher, one of three policymakers on the Fed's policy panel who dissented
against its latest policy experiment on Wednesday.
Still, those concerns have not deterred the Fed's majority
so far, and the ongoing threat of entrenched unemployment is likely to push
them to do even more unless the economy picks up quickly.
As JPMorgan's chief economist Michael Feroli observed: "Monetary policy's toothpaste tube is rolled up to the very end, and Bernanke is squeezing it with both hands, but there's just not much left in there."
