WASHINGTON — St. Louis Federal Reserve Bank President James Bullard Tuesday said that seeing Europe's stubbornly recurring high unemployment, he worries that joblessness can become increasingly structural in nature, less amenable to cyclical solutions like quantitative easing.
Interviewed on CNBC, Bullard said he's not too concerned about the latest jobs report's weakness. "It's not changing my outlook so far," he said. "I'm inclined to look past the report because of some mixed messages in there."
Despite only 88,000 new payroll slots after seasonal adjustment, less than half what was expected, Bullard said "You still have over 170,000 jobs (per month) over the last three months, you've got over 200,000 jobs over the last six months, you've got a first quarter that looks like it's going to be quite a bit stronger than what we expected at the beginning of January, so I think there's been a lot of good news."
"Maybe there will be revisions of this number, so I think we kind of want to wait and see," he continued.
"I don't think we have enough evidence right now to say that there's any kind of swoon going on and I don't really think this is like one of the other years" when there was a spring slowdown.
"Europe is a lot calmer than it was in 2011 or in 2010 or in 2012," he said, "and I don't see Europe coming back on to the global financial stage in a big way. I think Cyprus kind of showed that." That, he said, "will help the U.S. through the summer."
Bullard says he is still projecting the unemployment rate to be down near 7% at the end of the year "and I'm winning on that."
He said he's not surprised the labor force is not yet expanding with new entrants encouraged by lower unemployment since that phenomenon will have to wait for more improvement "until you get to much lower levels.
The trend of lower labor market participation, reinforced by the latest jobless report's lowest participation rate in more than three decades, has been under way since the year 2000, Bullard said, "so not all of that is just business cycle."
Bullard repeated that he sees more support on the FOMC for altering the pace of asset purchases in small ways in correlation with the change in economic data and that he still prefers to be data dependent, not date dependent.
"I'd be willing to move in small increments because that to me, that's the analogue of a 25-basis-point move," Bullard said. "You're not doing a lot on the particular day but you are signaling direction" among other things.
Noting the Wall Street Journal story Monday with an estimate of as much of a quarter of the trend of declining labor force participation is due to the large number of people still claiming Social Security disability checks, Bullard said, "It's all about hysteresis." Bullard was borrowing a term from electronics theory that has come to signify persistence of past weakness, like continuing unemployment becoming so embedded in the economy that is no longer only cyclical in nature.
But Bullard said his worry about hysteresis is not based on the persistence of high domestic disability payments, which could be linked to an aging population, but on what he has seen happening in Europe.
"If you just look at the euro area unemployment rate, they never got to six and a half" percent unemployment, "even in the best times," he said.
"I don't know a lot of detail about disability. There has been research in the macro literature about it. A simple thing to say is you have an aging population," Bullard said. "That might be a factor. If there's something else going on I think we should certainly get to the bottom of it."
A financial crisis brings with it persistent low growth and high unemployment for several years afterward, he said. "Unfortunately Europe, instead of coming out of recession as far as we have has in the last year and a half or two years turned around and gone back into recession," he said. "This is a huge economy that is going the wrong way. So that's been the main development on the global macroeconomic scene."
"When will it go away?," Bullard said. "You do eventually" go back to growth. "But it takes a long time for the lingering effects to go away."
On quantitative easing in general, Bullard said he is still concerned about "the big unknown," the size of the Fed's balance sheet.
However, he added, "We are taking risks, we are going deeper and deeper into the woods and that does concern me," he said. "But when you look at it overall the size of the Fed's balance sheet relative to GDP is actually not as high as a lot of these other central banks. So I think we've got some room to maneuver here and I think we're OK, at least for now."
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