THE TAYLOR RULE… JOHN’S NOT OPIE’S

220px-JohnBTaylorOLYMPUS DIGITAL CAMERABY: Adam Gavriel

In the United States, the unemployment rate continues to fall at a steady pace. There is a subliminal meaning in that however, as it is always important to note where these “lost” unemployed Americans are going. Are they all getting jobs? No way. Some of the decline in the unemployment rate is due to Americans who have left the workforce altogether.

In a editorial column on the Huffington Post, contributor Jared Bernstein offers a look into some of the deeper analytics of the unemployment rate. Mr. Bernstein notes specifically the effect of the Taylor Rule, and where the Federal Funds Rate (FFR) currently stands.

From Investopedia.com:

Taylor’s rule suggests that the Fed increases interest rates in times of high inflation, or when employment is above the full employment levels, and decreases interest rates in the opposite situations. This method of controlling interest rates has been fairly consistent with interest policy decisions, even though the Fed does not explicitly subscribe to the rule.” 

Bernstein notes that the FFR rate right now is -2, but should be closer to -4, based on the difference between the actual unemployment rate, and the reported unemployment rate.

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As you can clearly see from the graph, the actual unemployment rate sits at 10.2%, while the reported unemployment rate for September came in at a highly optimistic 7.2%

Getting more technical, Mr. Bernstein writes:

“So in plugging this adjusted rate into a Taylor rule, I arbitrarily cut the difference in half, which actually gets you closer to other estimates of the current downward bias in the jobless rate, which range from 1-2 percentage points.** Plotting both Taylor-rule-generated FFRs in the figure below, you see that the actual rate returns an FFR of about -2 percent, while adjusting for the downward bias in the jobless rate return an FFR of about -4 percent.”

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In conclusion, Mr. Bernstein cites that the Federal Reserve is doing a great justice to the American people by continuing it’s stimulus plan, in a time where many believe it’s time for the Fed to shut down and discontinue the incentives.

“All’s I’m sayin’ here is that we still have a lot of slack in the job market, highly elevated unemployment (any way you want to measure it), and a strong rationale for aggressive monetary stimulus, not to mention fiscal stimulus, but that is blocked by government dysfunction. The message here is thus: good for the politically independent Fed for keeping the monetary pedal to the metal. That’s certainly the direction in which the data are pointing.”

As we like to say here on the blog at Out Of Our Mind, never trust the unemployment rate as a sure understanding of the state of the economy.

You can follow Jared Bernstein on Twitter @econjared. And don’t forget to follow Crossroads Consulting on Twitter @EmploymentDepot,

If you’re one of America’s unemployed, we have you covered. Be sure to head on over to our website today to check out one of our over 50 job openings we are looking to fill TODAY.

Remember, at Crossroads Consulting we’re here to put the ‘human’ back into ‘human resources.’

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