Monday, October 10, 2011

Bernanke gloom

Fed chairman Bernanke in comment last week suggested that there "will sluggish job growth in the period ahead" and that "persistent factors" are holding the economy back. He also said that monetary policy is a "powerful tool" but not "a panacea" Fiscal policy is critical but the Fed will "will continue to work to create an environment that provides the greatest possible economic opportunity for all Americans."

No new policy but there seems a willingness of the Fed to engage in more behavior to help the economy. What may be a concern is the issue of hysteresis. A high unemployment rate that cannot be controlled by lead to a structural issue which will make it more difficult to rebound later. The longer someone is without work, the less likely he will find a new job. The fear is that allowing lower growth and the output gap to continue will cause a long-term harm. 

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