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Did Discouraged Workers Spook the Fed?

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SJOGRINGO   Wednesday, 09/18/13 08:10:40 PM
Re: SJOGRINGO post# 8
Post # of 40 
Did Discouraged Workers Spook the Fed?
September 18, 2013 Bloomberg.com
by Mark Gimein


The Federal Reserve today, shocking most observers, announced it would continue its stimulus policies without reducing bond purchases. The news sent U.S. markets to record highs. The big surprise here is that almost everyone expected the Fed to start tapering now that unemployment is drawing close to 7 percent.

Except that it's not.

As folks have been pointing out for a while (see, for instance, The Atlantic's Jordan Weissmann), the unemployment rate - now 7.3 percent - has been driven significantly not by workers gaining jobs, but by people giving up on looking work and so no longer getting counted as unemployed.

You can see the pattern in the chart of labor force participation below; the end of the recession and nominally improving economy has hardly slowed the outflow of workers from the labor force.

TMN-Labor-Force-Participation

Bloomberg's Rich Miller may have called this a week ago, explaining that the Fed is faced with the dilemma of figuring out whether, considering the increase in discouraged workers, the rate really reflects the state of the market.

That feels like the best explanation of the Fed's decision. Another factor here could be that the Fed was worried by a dramatic drop in housing starts and mortgages. Jeff Kearns highlighted that in a Bloomberg story today, noting it could be a strong argument against cutting the stimulus.

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