The Daily Capitalist: High Unemployment Until 2015?

Economics heavyweights predict Fed will opt to keep interest rates high as inflation curb

By Jeff Harding | updated logo | Published on 07.26.2009

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[Noozhawk note: This article has been updated with the author’s clarification of Meyer’s conclusions.]

While Laurence Meyer is no longer a governor (1996 to 2002) of the Federal Reserve, his commentary on the economy is widely followed. In remarks very few commentators picked up last week, he said we won’t return to full employment for six years. His reasoning was that the Fed, to control future inflation, will need to keep interest rates high.

“I think there’s going to be a long legacy of the financial crisis and the deep recession,” he said in an interview on Bloomberg Radio. “Full employment — or a jobless rate around 5 percent — won’t return until 2015.”

Meyer’s conclusions are based on an incorrect view of inflation (contrary to his conclusions, stagflation in the 1970s had high unemployment and high inflation):

A weak labor market “brings with it a significant decline in inflation,” below 1 percent next year, and near zero in 2011, Meyer predicted.

“That’s particularly important for the call when the FOMC (Federal Open Market Committee) is likely to exit from a near-zero rate policy,” he said. The consumer price index fell 1.4 percent from a year earlier in June, the weakest performance since January 1950.

But, Meyer’s thinking is the same as most economists at the Fed, including chairman Ben Bernanke. And that makes his comments significant because it demonstrates what the Fed’s likely response to inflation will be.

According to the Bloomberg article, Meyer’s views coincide with those of Mohamed El-Erian, chief executive officer of PIMCO, who foresees an extended period of elevated unemployment. El-Erian is another economist whose views are widely followed. His boss, Bill Gross, feels the Fed will not be able to easily stop the money gusher as the Fed thinks it will be able to do.

In light of my going out on a limb and predicting the future, and since these eminent gentlemen agree with my conclusions on high unemployment, I thought you’d want to know.

— Jeff Harding is a principal of Montecito Realty Investors LLC. A student of economics, he has a strong affinity for free-market economics. This commentary originally appeared on his blog, The Daily Capitalist.

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» Dick Jensen wrote on 07.26.09 @ 10:04 AM

I’m sure I’m confused. (Who isn’t?)  Jeff, you say above, “Meyer’s conclusions are based on an incorrect view of inflation (stagflation in the 1970s had high unemployment and high inflation)”

Then you go further to describe how most of the Fed’s economists, as well as PIMCO’s executive officer agree with Meyer leading you go go out and agree with them all. If it is an incorrect view, how come you agree with it?

(I guess it could be that the view about inflation is incorrect, but that the view about long-term unemployment is what you agree with—not commenting further on the inflation issue.)

» Send the illega aliens home wrote on 07.26.09 @ 03:04 PM

The time is right to arrest and deport all the illegal aliens and their anchor babies. 20 million living off you and I—many for Free welfare food stamps…

» Jeff Harding wrote on 07.26.09 @ 03:49 PM

I corrected this on my website to read: “(contrary to his conclusions, stagflation in the 1970s had high unemployment and high inflation)”. Sorry for the confusion. Good eye.

 

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