Bernanke Seen Not Knowing Jobless Rate Below Fed Forecasts

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By Caroline Salas Gage and Steve Matthews, Bloomberg.com

David Waldrop, 59, says he considers himself retired after searching unsuccessfully for work comparable to the job he lost in July 2007 at the U.S. Department of Energy in Atlanta.

“There was certainly nothing in my area at my level,” he said. While the right opening might pull him back to employment, for now he sees his exit from the U.S. labor force as permanent. “I don’t see it happening,” he said. “I don’t see anything offering opportunities.”

Waldrop is one of millions who have dropped out of the labor market in the aftermath of the deepest recession since the Great Depression, causing the employment-to-population ratio to fall to 58.6 percent from 62.7 percent at the end of 2007. Federal Reserve Chairman Ben S. Bernanke says the decline reflects weakness in the economy that’s causing discouraged Americans to leave the workforce, bolstering his decision to add to his record monetary stimulus in January.

Economists at Barclays Capital, UBS AG and Moody’s Corp. disagree. They say the percentage of people aged 16 and older with jobs is shrinking permanently because of a structural shift as baby boomers like Waldrop retire. This will contribute to the jobless rate falling to 7.8 percent by December, below the Fed’s prediction of 8.2 percent to 8.5 percent, according to Drew Matus, senior U.S. economist at UBS and Dean Maki, chief U.S. economist at Barclays.

Tighten Sooner

That may force Bernanke and his colleagues to tighten monetary policy sooner than their plan to keep the benchmark federal funds rate near zero until at least late 2014, or risk a surge in inflation, Matus and Maki predict. The policy-setting Federal Open Market Committee said after its March 13 meeting that “elevated” joblessness will “decline gradually,” in support of its rate pledge.

“Unemployment will come down faster, and the participation rate will be lower — that is what they have been missing,” Matus said in a telephone interview from his Stamford, Connecticut, office. “Every month that goes by, and the labor market performs differently than they expect, they are going to have to ask themselves: Are they using the right models?”

Joblessness was 8.3 percent in February, the lowest in three years, after the most robust six-month period of employment growth since 2006. It had risen as high as 10 percent in October 2009. The Fed lowered its forecast in January, after predicting in November that unemployment would be 8.5 percent to 8.7 percent at the end of this year.

To read more, visit:  http://www.bloomberg.com/news/2012-03-19/bernanke-seen-not-knowing-jobless-rate-less-than-fed-predictions.html

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