The U.S. unemployment rate would be around 7 percent instead of 8 percent to 9 percent without the current level of doubt among consumers about economic issues including fiscal policy, a Federal Reserve study showed.
“Uncertainty has pushed up the U.S. unemployment rate by between one and two percentage points since the start of the financial crisis in 2008,” Sylvain Leduc and Zheng Liu, who are research advisers at the San Francisco Fed, wrote in a paper released today. “The private sector responds to rising uncertainty by cutting back spending, leading to a rise in unemployment and reductions in both output and inflation.”
The Federal Open Market Committee on Sept. 13 announced it will hold interest rates near zero until at least mid-2015 and purchase $40 billion a month in mortgage debt until the labor market improves. The unemployment rate has exceeded 8 percent for 43 months, Labor Department figures showed Sept. 7.
“We’re looking for ongoing, sustained improvement in the labor market,” Chairman Ben S. Bernanke said in a press conference Sept. 13 following the FOMC’s two-day meeting. “There’s not a specific number we have in mind. What we’ve seen in the last six months isn’t it.”
Stocks rose after the Fed’s announcement as the central bank’s stimulus bolstered demand for riskier assets. The Standard & Poor’s 500 Index advanced last week to the highest level since December 2007. It slid 0.4 percent to 1,460.19 as of 2:46 p.m. today in New York.
Consumers’ doubts about the economy may have been a greater drag on the economy in the past few years compared to previous recessions because policy makers had never run out of room to lower the federal funds rate until 2008, Leduc and Liu said. Doubt played “essentially no role” during the 1981-1982 recession and the subsequent recovery, when the Fed’s benchmark interest rate was much higher, the authors’ analysis showed.
“Monetary policy makers typically try to mitigate uncertainty’s adverse effects the same way they respond to a fall in aggregate demand, by lowering nominal short-term interest rates,” the researchers said. “Because nominal rates cannot go significantly lower than their current near-zero level, policy is less able to counteract uncertainty’s negative economic effects.”
Leduc and Liu’s analysis also showed that greater uncertainty leads to higher unemployment for at least three years, while uncertainty’s impact on inflation is less persistent. The three-month Treasury bill rate falls as a result of heightened doubt, the authors wrote.
The paper used data from the Thomson Reuters/University of Michigan Surveys of Consumers to track the level of doubt reported by households.