Ever since the financial crisis a couple years ago, the U.S. has always been working on economy recovery. How close is the U.S. economy to healthy condition? According to Wall Street Journal, Janet Yellen, Federal Reserve Chairwomen, the U.S. economy and job market are still far from healthy, and still require plenty of support from the central bank’s low-interest-rate policy.
Regarding the U.S. economy, it is still considerably short of the two goals assigned to the Federal Reserve by the Congress – low and stable inflation and maximum sustainable employment. In order to deal with the U.S. economy, the central bank has implemented the low-interest-rate policies which include the actions such as reducing the level of short-term interest rates to near zero, and reducing longer-term interest rates and thus provide further support for the U.S. economy. The Federal Reserve has purchased large quantities of longer-term Treasury securities and longer-term securities issued or guaranteed by government-sponsored agencies such as Fannie Mae or Freddie Mac. Low interest rates help households and businesses finance new spending and help support the prices of many other assets, such as stocks and houses. The Fed has kept official interest rates at effectively zero since December 2008, and has vowed to keep them there for a considerable while longer. The recent decisions by the Fed are to reduce the amount of bonds it buys a month. In this sense, I believe that we can expect the long-term rates to go down.
How is the current employment situation in the U.S.? First of all, statistics on job turnover pointed to considerable slack in the labor market. Firms are still reluctant to increase the pace of hiring although it is now laying off fewer existing workers. On the employees’ side, they are less likely to quite their job voluntarily because they believe it hard to find another. Secondly, the wages are not increasing as the decline in unemployment. In my understandings, if the wages remain almost unchanged, the increase in price level will make it harder for people to make a living and thus decrease the domestic purchasing power as well as the domestic demand. Lastly, the labor force participation rate falls in a slack of job market when people who want a job give up trying to find a new one. If this continues, I am afraid that the lower participation could mean that current unemployment stated (6.7%) is overstating the progress in the labor market.