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The article “Fed Should Push Unemployment Well Below 5%, Paper Says” was published on March 25, 2015. This paper is organised as follow. First, a summary of the…
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Labor Economics
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Topic: Unemployment Article: Fed Should Push Unemployment Well Below 5%, Paper Says Introduction This paper reviews the article written by Pedro Nicolaci Da Costa on The Wall Street Journal about unemployment. The article “Fed Should Push Unemployment Well Below 5%, Paper Says” was published on March 25, 2015. This paper is organised as follow. First, a summary of the article is presented then I present my personal commentary on the issues in the article before concluding the paper.
Summary of the Article
The article reports of the study by Lawrence Ball, an economics professor and monetary expert at John Hopkins University. In the paper, Mr. Ball recommends that in order to keep unemployment levels below 5%, the Federal Reserve should keep short-term interest rate near zero long enough. This should be done even if inflation exceeds the central bank’s target 2%.
As Mr. Ball is proposing keeping the short-term interest rate near zero, the Fed is expected to start raising their benchmark short-term interest rate from near zero if the US economy continues to improve. In fact, the Fed’s updated economic forecasts show that unemployment is expected to fall from 5.5% to as low as 4.8% by the end of 2017.
Mr. Ball’s thinking is that the Fed can do more by pushing the unemployment rate lower than 5%, albeit temporarily, to create more jobs. Bringing the unemployment rate below 5% could enable some discouraged workers to re-enter the labour market, the unemployed find work, and the involuntary part-time workers find full-time jobs. He proposes that the interest rates be kept near zero well past the end of 2015.
The article notes that the Fed officials are worried that the period Mr. Ball is proposing for keeping the interest rates near zero is too long and the inflation could rise too high or fuel detrimental financial bubbles. But the president of Chicago Fed, Charles Evans, agrees with Mr. Ball’s views and states that raising the rates too soon would cripple the economic recovery and thus the Fed should keep them low until early 2016.
The article reports that Mr. Ball notes that the Fed can afford to err on the side of too much stimulus rather than too little of it in order to guard against a deflationary spiral. He therefore warns against raising the short term interest rates in 2015 terming such move as imprudent.
Personal Commentary
I agree that keeping the interest rates near zero will drive the unemployment rates lower than 5% and therefore keeping it low will be beneficial. The kind of unemployment the US is currently facing is majorly a cyclical inflation as the recession put most people out of jobs. While interest rates are an important aspect to look at, other factors come into play.
For instance, the consumption levels, investments, government spending, and demand for goods exported to other countries. Keeping the short-term interest rates near zero to tackle unemployment only deals with improving investment which will enable more businesses to employ more people. The other factors also need to be addressed in order to keep the unemployment rates below 5%.
While this is good for employment, it is worse for those who seek to invest through savings as lower rates work against them. However, savers may decide to invest in other securities such as equities or real estate.
Reference
Da Costa, Pedro Nicolaci. “Fed Should Push Unemployment Well Below 5%, Paper Says.” The Wall Street Journal 25 March 2015. Article. Read More
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