While the market was surprised last week when the Federal Reserve’s Open Market Committee decided to keep monetary stimulus going (also known as quantitative easing), it’s becoming clear that Obamacare is one of the driving forces behind the decision.
“The economy still needs the support of a very accommodative monetary policy,” said William Dudley, last week in a speech in New York according to the text of the speech provided by Bloomberg.com. Dudley is vice chairman of the Federal Open Market Committee, the committee that decides on continued quantitative easing measures. “Improving economic fundamentals versus fiscal drag and somewhat tighter financial conditions,” he said, “are pulling the economy in opposite directions, roughly cancelling each other.”
Dudley later more closely defined what he meant regarding fiscal drag by pointing to: 1) tax increases and 2) government budget cuts. But he also pointed out that the jobs picture isn’t quite a rosy as all that, either.
The unemployment rate, which has declined from 8.1 percent to 7.3 percent, top line, he said “overstates the degree of improvement” that jobs have made in the economy overall.
Last December Fed chair Ben Bernanke said that the reserve bank would like to see stimulus measures end when unemployment reached 6.5 percent.
But in June of this year, Bernanke then introduced new math to the equation by saying that unemployment would likely be around 7 percent when the tapering of quantitative easing would end.
“In this scenario when asset purchases ultimately come to an end the unemployment rate would likely be in the vicinity of 7%,” Bernanke told a press conference, “with solid economic growth supporting further job gains — a substantial improvement from the 8.1% unemployment rate that prevailed when the committee announced this program.”
Bernanke said back then that quantitative easing would be wrapping up sometime next year, while actual tapering would likely begin this fall.
And what’s changed since then?
As Dudley has pointed out, the labor market isn’t as robust as the underlying numbers would suggest.
And the labor market is being adversely affected by Obamacare.