Changes in the Central Bank's Balance Sheet, Employment, and QE to Infinity- Part 1

Much has been made of the Fed's decision to tie monetary policy to employment levels and the inflation rate. So the question is, do changes in the Fed's balance sheet assets lead to fluctuations in employment levels. To that end, Zero Hedge had an excerpt from Phoenix Capital on their website. The piece reads in part....

Last week the US Federal Reserve surprised yet again by announcing QE 4: a program through which it would purchase $45 billion of US Treasuries every month.

Between this program and the Fed’s QE 3 Program announced in September, the Fed will be monetizing $85 billion worth of assets every month ($40 billion worth of Treasuries and $45 billion worth of Mortgage Backed Securities) ad infinitum.

Indeed, the Fed’s new policies are anchored to its goal of getting employment down to 6.5%. This means the Fed will buy these assets non-stop until employment gets down to 6.5%.

First and foremost, QE does not create jobs. The UK has announced QE efforts equal to an amount greater than 20% of its GDP and has not seen any meaningful job growth. Similarly, Japan has announced nine rounds of QE for a combined effort equal to 20% of its GDP over the last 20 years and job growth remains dismal there.

Based on this, the Fed’s decision to anchor its QE efforts to employment is a bit hard to swallow. Instead, it’s much more likely that the Fed sees something “bad” coming down the pike and is moving preemptively to shore up the system again.

But what does the data say? The answer is there appears to be no relationship. The following is a chart of annual changes in the size of the Fed's balance sheet assets as compared to total seasonally adjusted levels of employment. 

Except for data that includes Q1 and Q2, there is no relationship between the size of the Fed's balance sheet and employment levels. In fact, a 12 month and 24 month lagged R-squared of 4.8% and 5.8%, respectively, show changes in the Fed's balance sheet provides little explanatory power in changes in employment. To me, this smacks of bad policy and is likely an indication that it will truly be QE to infinity.