Washington Post (03/12/13) Ylan Q. Mui
The U.S. Federal Reserve increasingly has become interested in setting policy that will influence the labor market, arguing that reducing unemployment is critical to the economic recovery. The Fed says it will keep interest rates at historic lows until the unemployment rate declines to at least 6.5%. The high unemployment rate has “imposed huge burdens on all too many American households and represents a substantial social cost,” says Fed vice chairman Janet Yellen. “I believe it’s appropriate for progress in the labor market to take center stage in the conduct of monetary policy.”
However, the connection between interest rates and employment is not clear. Although low interest rates spark consumer demand and help increase companies’ profits, that doesn’t necessarily translate into hiring. Many companies remain reluctant to hire even though sales have risen. Furthermore, the Fed has no influence over intrinsic changes to the economy, such as the move away from manufacturing to service jobs.