Pimco’s Kashkari: Fed ‘Has Limited Tools’ to Fight Unemployment

Friday, 14 Dec 2012 08:07 AM

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The Federal Reserve’s decision to loosen monetary policy and peg it to unemployment rates may pump up stock prices, but the Fed is largely powerless to seriously combat joblessness, said Neel Kashkari, head of global equities at fund giant Pimco.

The Fed recently said interest rates will stay near zero as long as unemployment rates remain above 6.5 percent, well above today’s rate of 7.7 percent, and as long as inflation rates don’t threaten to push past a 2.5 percent threshold.

While loose monetary policies may pump up stocks prices, arguably by design, they can’t put those who have been unemployed for too long back to work.

Editor's Note: This Wasn’t an Accident — Experts Testify on Financial Meltdown

Too many Americans have been out of work for too long, making them known as “structurally” unemployable since their skills have grown obsolete.

“As people become detached from the labor force, unfortunately they become unemployable,” Kashkari told CNBC.

The unemployment rates measures the participation of the labor force that is out of work.

Unemployed Americans who are not actively seeking work aren’t counted as part of the labor force, though factor back in those discouraged workers — fed up with fruitless job searches over the years — and the unemployment rate would be much higher and take longer to fall, especially as the economy absorbs newcomers to the job market.

“This is a very, very tough problem for the U.S. economy, and [Fed] Chairman [Ben] Bernanke has very limited tools in what he can do about it,” Kashkari said.

While most hope 6.5 percent doesn’t represent the new floor determining how low unemployment rates will dip these days, the longer people remain out of work, the higher that floor will be.

“The longer people stay unemployed the more structural it becomes. The Fed is really in a box here — they’re trying to engineer financial market outcomes, trying to raise the prices of risk assets across the economy,” Kashkari said.

The problem, Kashkari added, is that while the Fed engineers market activity, it can’t engineer real economic improvement.

“They can make the financial markets look better, but even at that, they’re becoming marginally less effective. They’re needing to use more and more stimulus just to engineer those financial market outcomes. So we’re happy that they’re trying to do what they can do, but we don’t think it’s going to lead to real economic growth.”

On top of tying interest rates to unemployment and inflation rates, the Fed beefed up its bond-buying program to stimulate the economy even further.

Specifically, the Fed announced plans to bolster its stimulus program by buying $45 billion in Treasury holdings a month from banks with the aim of spurring recovery and cutting into high unemployment rates.

The bond purchases come on top of $40 billion in mortgage debt the Fed is currently purchasing from the country’s financial institutions, a policy known as quantitative easing but dubbed by many as printing money out of thin air.

“Bernanke is pulling out all the stops to kick this economy back into a higher gear,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, according to Bloomberg.

“They are buying everything in sight — Treasurys, mortgage-backed securities — and will keep rates low until everyone who wants a job has one.”

Editor's Note:
This Wasn’t an Accident — Experts Testify on Financial Meltdown

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