Federal Reserve Chairman Ben Bernanke has pledged to keep interest rates at zero until unemployment dips down to 6.5 percent. This policy has gotten a lot of press, but few people have actually calculated how long that could be.
However, the Federal Reserve Bank of Atlanta has a calculator where you can input data to estimate the date.
To say the numbers are frightening is an understatement. I assumed a labor participation rate of 66, which was the rate in September 2008, before the collapse of Lehman Brothers and the near meltdown of the global financial system. I assumed that the population would grow at the rate it has in the past 12 months, which is the default option on the calculator. I wanted to see if we could even get an interest rate increase before 2020. According to the calculator, the United States would have to produce over 180,000 jobs a month to just get to 6.5 percent before 2020.
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Are 180,000 jobs a month a lot? The answer is yes. Even in the Ronald Reagan years, the rate of job growth was closer to 150,000 a month, and under Bill Clinton it was 230,000 a month, which was partially fueled by the massive tech bubble.
Furthermore, in 2012 approximately 150,000 jobs were created each month. There would need to be a massive increase every month for the next eight years to hit 6.5 percent.
But it gets worse. We have had interest rates at zero for longer than four years. Additionally, we have had massive deficit spending, which most economists agree helps employment at least in the short run. It is hard to imagine this policy continuing for eight more years.
Hyperinflation has been an incorrect prediction by many economists. However, the combination of interest rates at zero for 12 years, and massive deficit spending would likely lead to inflation sometime within the next eight years.
That would force Bernanke to break his pledge or raise rates, which would likely slow economic growth.
That issue ties into another problem with low interest rates. Business cycles occur, and the odds are likely that there will be a recession within the next eight years. Normally, the Fed can lower rates to help ease the slowdown while watching inflation signals.
However, Bernanke will not have this option. So when the next downturn does occur, few options are left. This would likely harm the economy even further and depress future job growth.
Bernanke was not handed the best set of cards, but he may want to reconsider his current policy. If everything went perfectly we would get interest rates at zero for 12 total years. However, this is extremely unlikely and therefore unless Bernanke abandons policy we could see interest rates at zero well into the 2020s.
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