The Fed's Deceptive Target to End QE3

If you took Boston Fed President Eric Rosengren's target for ending QE3 at face value, you should be very happy. We're only .65% away from the 7.25% unemployment rate target he anticipates.

Unfortunately, with how the Bureau of Labor Statistics (BLS) unemployment rate metrics mask the real story. The target is virtually impossible to reach for years to come.

The reason why is perfectly illustrated by the latest unemployment figures coming out of the BLS. The US added 171,000 jobs in October and revised August and September figures up 84,000. At the same time, the unemployment rate went up to 7.9%.

The unemployment rate rose because 578,000 people entered the workforce. The BLS didn't track them before because they were not actively looking for work.

To see how this will continue to pan out, take a look at a graph from the St. Louis Federal Reserve Bank:

The U-6 measurement from the BLS, combines, in their words, “U-6 Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force.”

The BLS has to further define these categories, “Persons marginally attached to the labor force are those who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the past 12 months. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not currently looking for work.”

To put it in simple terms, 14.6% of the population is unemployed or underemployed and wants a job.

As the job market starts to recover or posts a good monthly gain, these people start flooding back into the “actively looking for work” category and reappear in official unemployment figures.

As we can see from the much lower U-6 rates before the recession, we're a long way from realistically hitting a 7.25% unemployment rate.

Mr. Rosengren's target may seem close on the surface, along with an end for QE3. However, at the rate the USA is adding jobs, it will take many years to actually get there.

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