I never said Kudos to Charles Evans, President of the Federal Reserve Bank of Chicago, for dissenting in the most recent FOMC meeting on behalf of the unemployed: “Voting against the action was Charles L. Evans, who supported additional policy accommodation at this time.” I’m a big fan of the Evans Rule, and am surprised doves haven’t been more forceful on this. As Goldman Sachs noted, “This was the first ‘dovish’ dissent since December 2007 (President Rosengren).” Given that unemployment has turned out to be worse than the Fed projected at any moment, it is about time that those who are worried about unemployment inside the Fed start getting loud – else the right-wing dissents make Bernanke look more aggressive than he actually is.
Let’s compare the unemployment response to the financial bailouts. Bloomberg just released a big story, based on their successful FOIA lawsuits, that tells just how aggressive the Federal Reserve was with its emergency lender-of-last-resort powers. Kevin Drum, Matthew Yglesias and Paul Krugman argue that what is really shocking is how total the rescue and backing of the financial sector was while the real economy was left to rot: “the real scandal isn’t so much that those banks got rescued as that the rest of the population didn’t.”
Part of why the bailouts were packaged the way they were was because the bankruptcy of Lehman Brothers went a lot worse than the Federal Reserve had anticipated. The Federal Reserve had an expectation of how the collapse of a major investment bank like Lehman would go, and when it went far worse than their expectation they reacted with maximum force.
Is there an equivalent story for unemployment when it comes to expectations? Let’s try to graph this out. We’ll use the FRB’s Summary of Economic Projections. FAQ: “Economic projections are collected from each member of the Board of Governors and each Federal Reserve Bank president four times a year, in connection with the Federal Open Market Committee’s usual two-day meetings (typically held in January, April, June, and November)… The unemployment rate is the average civilian unemployment rate in the fourth quarter of a year.”
Members of the Federal Reserve get together four times a year and projects their expectations of unemployment for several years out. Let’s take that data and plot it against the unemployment rate. (Specifically, we are going to plot the average projected unemployment rate from the FRB across the entire year, and we are going to take the average of the core tendencies that are reported as that rate.) What does that look like against the actual unemployment rate? Graphing the actual unemployment in bold red and projections from each point going forward in shades of orange (click for larger image):
As you can see, there’s no point in which unemployment has been projected to be worse than it actually turned out to be. Especially in 2009-2010, we can see that the actual unemployment rate is significantly higher a year or two later than their projections of unemployment. Let’s zoom in on the 09-11 range (click for larger image):
If we were to replace the FRB with a group of monkeys armed with darts, one would imagine that the second group would get at least a few projections of unemployment above the actual rate of unemployment. You can see the FRB trying to revise how bad unemployment is, but they don’t revise it anywhere near enough to where the economy actually is.
To recap: Lehman Brothers goes worse than the Federal Reserve’s projection and the Fed goes to the most extreme lengths it can find to extend emergency lending. Every single unemployment number turns out to be worse than all of the Federal Reserve’s projections, and the Federal Reserve finds every excuse to look the other way. Only Charles Evans has the courage to say that we should let inflation go to 3% while unemployment is over 7% to catch up to trend growth. Amazing.