I found the below chart rather interesting. It shows the futility of the Fed's efforts of linking monetary policy and the unemployment rate. Bernanke has stated publicly (here for instance) that the Fed's efforts in monetary policy and asset purchases are targeting higher asset prices, in the hopes that higher prices raise overall risk taking and economy with it. This transfer mechanism has been clearly debunked by many analysts, for instance see John Hussman's weekly comments at hussmanfunds.com.
In the last few months, the rhetoric has turned towards employment, as Bernanke and the Fed have linked their asset purchasing asset levels, or lack thereof via the taper, to both inflation and more importantly employment. The claim that monetary policy and employment levels are linked is weak at best. To prove this, I looked at the annual changes in the weekly jobless claims compared to similar changes in the Fed Funds Rate. I use the Fed Funds Rate in this analysis because it is the rate most directly under the influence of the Federal Reserve and monetary policy.
What the data shows is that the relationship between the two is, at best, week. Without delving into all the numbers, the one-year forward R-squared of the Fed Funds on jobless claims is just 23.7%. This figure shows a weak relationship between the two and that more likely other factors over monetary policy drive employment levels.
The chart below provides more damning evidence. The chart shows the rolling 1-year forward correlation and R-squared of the Fed Funds on jobless claims.
What I see here is that in some instances, a strong relationship between monetary policy and employment levels exists. However, these moments are fleeting. In all months observed, less than 27% of the months exhibited R-squareds at or above the 50% level. Additionally, roughly 10% of the months since 1968 showed a strong relationship of 75% or more. Worse still, a predominance of the R-squareds, more than 50%, exhibited a weak r-R-squared of 25% or less.
To me, this analysis suggests a weak relationship between monetary policy and employment. More so, the relational analysis implies the efforts by the Fed to raise employment via asset buying are in fact an exercise in futility .
In the last few months, the rhetoric has turned towards employment, as Bernanke and the Fed have linked their asset purchasing asset levels, or lack thereof via the taper, to both inflation and more importantly employment. The claim that monetary policy and employment levels are linked is weak at best. To prove this, I looked at the annual changes in the weekly jobless claims compared to similar changes in the Fed Funds Rate. I use the Fed Funds Rate in this analysis because it is the rate most directly under the influence of the Federal Reserve and monetary policy.
What the data shows is that the relationship between the two is, at best, week. Without delving into all the numbers, the one-year forward R-squared of the Fed Funds on jobless claims is just 23.7%. This figure shows a weak relationship between the two and that more likely other factors over monetary policy drive employment levels.
The chart below provides more damning evidence. The chart shows the rolling 1-year forward correlation and R-squared of the Fed Funds on jobless claims.
What I see here is that in some instances, a strong relationship between monetary policy and employment levels exists. However, these moments are fleeting. In all months observed, less than 27% of the months exhibited R-squareds at or above the 50% level. Additionally, roughly 10% of the months since 1968 showed a strong relationship of 75% or more. Worse still, a predominance of the R-squareds, more than 50%, exhibited a weak r-R-squared of 25% or less.
To me, this analysis suggests a weak relationship between monetary policy and employment. More so, the relational analysis implies the efforts by the Fed to raise employment via asset buying are in fact an exercise in futility .
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