Slow Employment Recoveries, Monetary Policy, and Expected Inflation

By Carlson, John B.; Lindner, John | Economic Trends, May 2012 | Go to article overview

Slow Employment Recoveries, Monetary Policy, and Expected Inflation


Carlson, John B., Lindner, John, Economic Trends


04.25.2012

Since the early 1990s, employment growth has been persistently slow coming out of recessions. This phenomenon, often described as a "jobless" recovery, has become increasingly severe over the past two decades, posing new challenges for monetary policy. Achieving maximum employment, along with price stability, is one of the two policy objectives mandated by Congress for the Federal Reserve.

[GRAPHIC OMITTED]

[GRAPHIC OMITTED]

Not surprisingly, the jobless recovery phenomenon has prompted somewhat unprecedented interest rate policies from the Fed. These policies have been characterized by long periods of constant and increasingly lower levels of the federal funds rate following each of the last three recessions.

Each of the low-interest-rate periods has posed unique challenges for the communication of policy actions, especially at the onset of policy tightening. It is useful to review some key attributes that characterize the three policy episodes.

Just prior to and following the previous three recessions, the Fed aggressively lowered interest rates and held the fed funds rate at a low level for a period of several months. The recession in 1990-1991 induced a decline in the fed funds rate from over 9 percent to 3 percent, where it remained for 17 months. That stretch of 3 percent interest rates came to a sudden end in February 1994, when market participants were surprised by 50 basis point increase in the fed funds rate. Bond prices fell sharply after investors failed to anticipate the Fed's series of policy firming moves, which were deemed necessary to contain inflationary pressures.

During and after the 2001 recession, the Fed also reduced the fed funds rate significantly, this time from 6.5 percent to 1 percent. The 1 percent interest rate was held for an entire year. Given the surprise the markets experienced in 1994, the Federal Open Market Committee (FOMC) introduced forward-looking language in its policy statements prior to the first firming move to reduce the potential for a disorderly surprise.

[GRAPHIC OMITTED]

Many analysts have criticized the FOMC for keeping interest rates too low for too long during this episode. One factor that misled policymakers during this period was the FOMC's preferred measure of underlying inflation. The Fed had adopted the core PCE as its key measure of inflation, but estimates of PCE inflation are subject to revisions, and in this case the revisions were quite substantial. As a result, the FOMC was gauging its policy actions on measures that suggested inflation rates were lower and falling faster than the subsequently revised numbers now indicate. Perhaps had policy firming been initiated sooner, the housing market bubble would have been less severe and less damaging to the economy.

The most recent policy episode has been the most extreme of the three, reflecting the worst recession since the Great Depression. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Slow Employment Recoveries, Monetary Policy, and Expected Inflation
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.