How Effective is Monetary Policy?
Today, the Bureau of Labor Statistics released the latest version of its “Employment Situation Survey,” a report that regularly provides information on how many jobs are “created” in the economy. The new report explains that employers added 243,000 non-farm payroll jobs in February, and the unemployment rate remained at about 4.8 percent.
The survey also indicates that average hourly earnings have been rising a bit. In fact, according to the last twelve surveys, the U.S. economy has added about 2 million jobs during the last year (from February 2005 to February 2006). What does this have to do with monetary policy?
As explained in today’s Wall Street Journal (subscription required for full article):
The Fed has raised interest rates 14 straight times in quarter-point increments to 4.5%, and have stressed in recent weeks that future moves will be dependent on economic data.
As the story goes, the Federal Reserve is supposed to be able to “cool off” the economy by raising the Fed-Funds target. The problem is inflation. For example, if too many jobs are created too fast, and/or if wages rise too fast, prices could rise throughout the economy. Pushing interest rates upward is supposed to reverse this situation, thus heading off inflation.
So, here are my questions for discussion:
If monetary policy really works, how is that wages have been rising and more employers have been hiring even though the Fed has been raising rate targets every quarter (for the last 14 in a row)?
Is it wise to have a national policy that, essentially, penalizes people for improving their economic situation?
NM
March 10th, 2006 at 11:55 pm
Living here in the gulf south I can understand how interest rates gradually increase nationally with wages increasing along side them. Within the last two years alone no state on the gulf coast has been passed over by a hurricane. From Texas to Florida storms have ravaged communities both large and small. The impact from the storms has sparked construction, both residential and commercial. The shortage of skilled workers is apparent also, just drive down any heavily traveled street in Louisiana and you can’t but help notice all the help wanted signs.
Although storms account for much of the economic stimulus for the gulf south in it’s rebound, the rest of the country is feeling an impact from not only gulf coast hurricanes but from the war in Iraq. Goods were being produced for the Department of Defense in preparation for the war in Iraq, and the production of goods still goes on today. Up-armored vehicles for troops to use on their daily missions and also the production of heavy equipment and construction materials for the rebuilding process.
The above mentioned factors are what I believe to be some of the biggest contributors to increased worker wages, while the Fed continues to gradually raise interest rates.