Goldman Sachs: Why the Federal Reserve could keep printing longer than anyone imagines


From Zero Hedge:

The second half of 2012 saw a significant shift in U.S. monetary policy from calendar-based guidance to outcome-based guidance and the adoption of a 6.5% unemployment rate as a threshold for ‘tapering.’

With Friday’s better-than-expected payroll data and another tick lower in the critical-to-liquidity unemployment rate, it seems Goldman Sachs (and others) are waking up to the facts that we have been vociferous about: the shift of jobless individuals from unemployment into inactivity (the participation rate dilemma) is making the unemployment rate a less appropriate measure of broad labor market conditions.

This has important implications for Fed policy because it implies that the committee might still be quite far from reaching the jobs side of its mandate even once the unemployment rate is back at 6%.

After all, the Federal Reserve Act calls for ‘maximum employment,’ not ‘minimum unemployment.’ This distinction did not matter much in the past, but it is becoming increasingly important. The ‘participation gap’ remains as big a drag on growth as ‘unemployment’ and we, like Goldman, would expect the Fed to ‘change’ its target for their outcome-based guidance (to enable more printing).

Via Goldman Sachs:

The second half of 2012 saw a decisive shift in U.S. monetary policy. One aspect was the move to open-ended asset purchases of $85 billion per month.

The other aspect — and our focus today — was the adoption of a 6.5% unemployment rate as a threshold for the first hike in the federal funds rate. The motivation for the move…

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