Federal Reserve transition expected to be seamless

by Michelle Saxton
Wednesday, February 5, 2014

The U.S. Federal Reserve System will eventually need to start raising interest rates, and the central bank’s newest leader will need to effectively deal with resistance, a University of North Carolina Wilmington Cameron School of Business official says.

“Within the next few years Janet Yellen is going to have to start to get a little tougher in terms of policy,” Dr. Tom Simpson, executive in residence for UNCW’s Department of Economics and Finance, said in a Monday, Feb. 3, phone interview. “She’s going to have to remove the punch bowl.”

Yellen has a good overall rapport with Capitol Hill and can meet the challenges of determining when to increase the Fed’s policy interest rate toward a more normal level and having the fortitude to proceed, said Simpson, who retired from the Federal Reserve’s Board of Governors and was a colleague of Yellen and her predecessor, Ben Bernanke.

Yellen is the first woman to serve as the Fed’s chair, which Simpson said makes no difference.

“She easily makes it over the bar in terms of qualifications,” Simpson said, but added, “In any respect this is the most powerful economic policy position in the world, and it’s nice to see that we’ve been able to demonstrate that women can achieve that level as well as men.”

Simpson, who worked at the Federal Reserve for about 30 years, first knew Yellen when she was an economist with the Board of Governors and Bernanke when he was a professor at Princeton University. He stepped down as Federal Reserve chair Jan. 31 and became a distinguished fellow in residence at the Brookings Institution, a Washington, D.C.,-based public policy nonprofit organization. 

“This is going to be a relatively seamless transition in the sense that both have very comparable training and experience and have very, very similar ways of viewing the world,” Simpson said. 

Unemployment on slippery slope

Simpson credited Bernanke for helping the nation during the 2007-08 financial crisis to avoid another Great Depression.

“Unemployment rose to over 10 percent, but in the Great Depression unemployment was 25 percent,” Simpson said.

Jobs remain an issue, despite lower unemployment rates, Simpson said.

“We still have a situation where there are a lot of people who are looking for work and have been having a hard time of it, and it requires a stronger economy to be able to get these people into jobs,” Simpson said. “This has been a very disappointing recovery thus far.” 

The N.C. Justice Center in Raleigh has attributed a drop in the state’s jobless rate to a shrinking labor force, not employment gains.

North Carolina’s unemployment rate, seasonally adjusted, dropped to 6.9 percent in December from 7.4 percent in November, while the national rate decreased to 6.7 percent from 7 percent, the state Department of Commerce reported.

New Hanover County’s unemployment rate was 6.7 percent November 2013, down from 7.5 percent in October and from 8.7 percent in November 2012, department statistics showed. Those latest rates were not seasonally adjusted.

While the nation has made progress with the unemployment rate, the rate may normally fall during times of economic weakness because some people give up, Simpson said.

“There is an awful lot of validity to the fact that much of the decline in the unemployment rate that we’ve experienced over the last couple of years owes to people withdrawing from the labor force,” Simpson said. 

It is difficult to analyze how much of the change is due to cyclical factors, such as weaknesses in the economy and job market, and how much is because of demographics, such as baby boomers retiring, Simpson said.

When things get better, people will come out of the woodwork looking for jobs, which will prevent the unemployment rate from going down as much, he said.

Simpson compared the unemployment rate changes to musical chairs.

“When these people enter the labor force … some of the jobs will be taken by them, some of the jobs will be taken by people who were unemployed,” Simpson said. “But then the people who entered the labor force who didn’t step right into a job, they will become unemployed.”

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