Federal Reserve Can't Do Much More to Boost Job Growth, EconomyJuly's steep decline in home sales is just the latest symptom of the slowdown in the U.S. economy, and unemployment continues to hover at stratospheric levels. Investors, meanwhile, are increasingly turning their attention to the Federal Reserve to see how the world's most powerful economic body will respond.

Passions run high on the subject of what the Fed should do next. Some pundits argue that major actions to boost the economy are urgently needed. Others say that the current easy money policies are actually planting the seeds for bigger disasters later.

But despite the haranguing for action from both sides, the Fed's ability to impact major issues such as unemployment may be far more limited than most assume. Some members of the Fed, meanwhile, are becoming increasingly open about the institution's limitations.

There is no shortage of high-profile market commentators looking for the Fed to step in with measures to boost growth, of course. Goldman Sachs (GS) chief U.S. economist Jan Hatzius told Bloomberg News this week that he expects further easing of monetary policy, and says anything short of a $1 trillion is a waste of time when it comes to the Fed making additional securities purchases.

A vocal minority, meanwhile, says that the Fed is making things much worse with its easy money policy, and is pushing for a sharp rise in interest rates. Raghuram Rajan, a former International Monetary Fund chief economist and now a professor at the University of Chicago, this week urged the Fed to hike interest rates by a massive 2% in order to stave off future asset bubbles.

A Mismatch Between Skills and Jobs


Raising interest rates while unemployment remains near 10% and inflation is tame flies in the face of conventional wisdom, but Rajan's track record suggests there are good reasons to hear him out. Back in 2005, he warned of growing risk to the banking system, though then-Fed Chairman Alan Greenspan was largely dismissive of his concerns.

Still, deflating future bubbles hardly seems to be the most pressing concern when the economic doldrums are inflicting serous suffering here and now. But when it comes to easing that pain by fostering job creation, some at the Fed are openly wondering what more they can do.

Minneapolis Fed president Narayana Kocherlakota, for example, recently chalked up a large portion of the high unemployment rate to a mismatch between skills and geography, rather than merely a lack of overall demand for workers.

"Monetary stimulus has provided conditions so that manufacturing plants want to hire new workers," Kocherlakota said. "But the Fed does not have a means to transform construction workers into manufacturing workers."

The magnitude of the unemployment created by those mismatches is enormous, according to Kocherlakota's calculations. Judging by job openings listed, he estimates that if the skills issue was eliminated, the unemployment rate would be closer to 6.5% than its current 9.5%.

There are plenty of developments that would seen to corroborate Kocherlakota's calculations. Some employers are complaining that a shortage of skilled manufacturing workers is the biggest factor limiting their growth. Countries like Germany, with vast pools of skilled manufacturing labor in their workforces, meanwhile, are seeing their economies boom thanks to demand from fast-developing overseas markets in Asia and Latin America.

Policymakers, then, may want to make a recalibration of the U.S. workforce a bigger priority, while toning down schemes to prop up demand at home. Worker retraining and measures to ease the pain of transition should be bigger priorities and absorb more resources than schemes to prop up asset prices.

As the Fed prepares for its annual meeting in Jackson Hole, Wyo., pundits on both sides will no doubt be shouting for it to take quick action. But at least for now, the Fed board may simply have to do nothing, and try to find some new answers as it enjoys its yearly getaway.

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npwork

A couple of points the article didn't mention: #1: in Germany, the government subsidizes job training. Based on test scores, students are tracked into either college prep or trades. If you qualify for college (which isn't easy), it's heavily subsidized. You don't have to take out a mountain of student loans to pay for it. If you are in the trade track, you get training and a paid apprenticeship is arranged for you -- again, subsidized by the government. That is why they have skilled machinists when we don't. It also ties in with point #2: US companies complain about the lack of skilled workers, but none of them are willing to train. Nobody cares what you could do, they only care what you have already done. If more companies were willing to train applicants with promise but no experience, many of the unfilled jobs could be filled and the unemployment rate would go down. We are not willing to invest in our own people.

August 31 2010 at 2:02 AM Report abuse rate up rate down Reply
bobnglenwood

Simple solution: Make it so expensive to import items manufactured overseas that the maufacturers move the facilities back into the U.S. where they should be. The taxes the governments collect on gasoline is why it is so expensive. The taxes were supposed to be used to fix the highways. How are the roads in your town? Why not go to the national sales tax. Think the illegal aliens who get paid in cash pay any taxes? How many people do you know who are working under the table or bartering for goods and services? Trade babysitting for yard work? Oil change for housecleaning. Is that unemployed? Are they getting benefits? Why do we allow the people who draw "benefits" to collect a check without any requirement to pass a drug test or get an education while not working? We have allowed an entitlement mentality to capture the youth of America. I am sure more girls will be having children when the monthly entitlement exceeds the minimum wage minus expenses for transportation and childcare. I know I have very conservative ideas. I don't care if you like them or not but I would ask that you offer some reasonable alternatives instead of just blasting me as a hater. Quit calling people names and offer some ideas. Let's get this situation under control while we still can. No one is totally right, and no one is totally wrong but lets throw the special interests under the bus before they do it to us.

August 27 2010 at 12:12 AM Report abuse +2 rate up rate down Reply
bobnglenwood

In a time of insane squandering of our money, why would I be surprised to hear the FED is holding their meeting in Jackson Hole,WY. Could there be a more remote spot to hold it. Only in America. With the internet and netmeeting etc. why are conventions necessary other than to allow padding of expense accounts. Multi million $$$ bonuses to the guys who robbed us in the first place. This is out of control.

August 26 2010 at 11:56 PM Report abuse rate up rate down Reply
jsbseven

GET RID OF OBAMA AND HIS THUGS AND PUT THINGS BACK THE WAY THEY WERE AND CUT TAXES BEFORE MOST OF US ARE ON CAT FOOD

August 26 2010 at 7:14 PM Report abuse rate up rate down Reply
samithelion

LIberals opinions are no longer of any consequence.

August 26 2010 at 9:26 AM Report abuse -2 rate up rate down Reply
kmbw106

The solutions are so very simple. First, the government needs to STOP spending. Second, the government need to LOWER taxes. Third, the interest rates should be a minimum of 6%. If we add up all the taxes we pay for every little item, we would be so curious as to where the money is going. There is so much waste and so much fraud.

August 26 2010 at 8:40 AM Report abuse +2 rate up rate down Reply
goatboyee99

Hmmm, let me see..."a shortage of SKILLED workers is the biggest problem facing industry today". I wonder if that has anything to do with the fact that practically ALL the US manufacturing jobs are now overseas.If a kid doesn't have a joystick, mouse or a cell phone to operate a machine or a device with, they're screwed!, Hre's a thought> Why don't we lift the ban on teens working, and hire them so that they actually HAVE some skills when they get to the workforce.

August 26 2010 at 8:36 AM Report abuse +3 rate up rate down Reply
Jan

I just received my county tax bill. My home in 2007 when purchased had a fair market value of 211k, it is now at 128k. THIS IS THE PROBLEM, through no fault of mine. I still have to pay a mortgage for a purchase price of 230k. You want to boost the economy? Restructer mortgages to current market value with a 5 year freeze. Banks won't loose, they will be able to charge all their interest up front again. If it is based on % owed on the property it would free up ALOT of spending money!Someone who only has a couple of years left to pay will be fine, It is the ones who still owe 25-30 years who are hurting.

August 26 2010 at 7:20 AM Report abuse +1 rate up rate down Reply
1 reply to Jan's comment
samithelion

My home was paid off several years ago and now is worth 100,000 less than the market value was a couple of years ago. Sounds like I should get a refund. You must be an obama voter. Funny post.

August 26 2010 at 8:05 AM Report abuse -1 rate up rate down Reply
k4jlp

THE FEDERAL RESERVE IS THE PROBLEM, THAT ALONG WITH ENERGY PRICES THAT ARE SPECULATED TO DEATH BY TRADERS...GAS AT THE PUMP SHOULD BE 1.29/GALLON AT THE MOST. ADD TO THAT THE HEALTH INSURANCE INDUSTRY THAT PAYS NOTHING UNTIL THE DEDUCTABLES ARE MET, AND THE MASSIVE LOSS OF JOBS ACROSS THE COUNTRY. IT DOES NOT TAKE A ROCKET SCIENTIST TO FIGURE THIS OUT PEOPLE. CONSUMER CONFIDANCE IS AT ALL TIME LOWS, AND ALL THE WHILE ALL THE DEMOCRATS AND REPUBLICANS KNOW HOW TO DO IS FINGER POINT, THEY CANNOT GET ANYTHING DONE EXCEPT FUND WARS AND STAY IN BED WITH THE ENERGY LIARS AND GOLDMAN SACHS. ALL I CAN SAY IS "PAYBACK IS HELL".

August 26 2010 at 7:15 AM Report abuse +5 rate up rate down Reply
1 reply to k4jlp's comment
danzillo4

What many dont realize is...when home prices go up so do the property taxes, then they raid the till, it's never ending...

August 26 2010 at 5:42 AM Report abuse +1 rate up rate down Reply