Policy: Labor

The week ahead in economics: The European Central Bank's experiment

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The biggest event in economics policy this week is expected to come Thursday, when the European Central Bank likely will take an unprecedented step into unconventional monetary policy.

With unemployment in the double digits and inflation slowing to near-deflation -- and the memory of the 2012 double-dip euro area recession still fresh -- ECB President Mario Draghi said at the April meeting that the bank soon would consider unconventional monetary policies to spur economic growth. That would include, he said, a "rich and ample" discussion of monetary easing -- large-scale bond purchases intended to boost asset prices and spur spending.

Instead of quantitative easing, however, it's negative interest rates that Draghi is expected to announce at Thursday's meeting in Frankfurt. It is widely expected that the ECB will set a "negative deposit rate" for banks holding money overnight at the central bank. In other words, the ECB will charge banks to hold their money, in an effort to spur lending.

That would be the latest in a number of unconventional monetary policy experiments central banks have undertaken over the course of the recovery from the financial crisis of 2008.

Notably, one such program, Japan's "Abenomics" efforts, received good news last week.

Abenomics, named for Prime Minister Shinzo Abe, involves a coordinated effort between the Bank of Japan and the government to engage in monetary stimulus while also boosting government spending and instituting regulatory reforms. The program is intended to put an end to the stagnation and deflation that has plagued the country for two decades.

On Friday, the Japanese government reported that inflation continued to rise in April, after prices had fallen for much of 2012 and 2013. Economic growth also beat expectations in April, with gross domestic product growing for the sixth consecutive quarter.

There are mitigating factors, but the big picture is that the Bank of Japan's efforts are having the intended effect, for now. In recent weeks, Bank of Japan Governor Haruhiko Kuroda has called on Abe and the government to move into the next phase of Abenomics, namely regulatory reforms.

Meanwhile, the United States' own experiment with unconventional monetary policy has been complicated by the contraction of the economy in the first quarter of 2014.

Since the crisis, the Federal Reserve has tried to boost economic growth with forward guidance (promising near-zero interest rates far out into the future) and quantitative easing programs in 2010-2011 and 2012 through the present.

The Fed, under Ben Bernanke and Janet Yellen, has led other central banks in implementing unconventional monetary policies, and it is possible that in doing so it has helped the U.S. avoid the double-dip recession that Europe suffered.

Nevertheless, it's also the case that the Fed, with other government agencies, has consistently overestimated the strength of the recovery. In January, Yellen expressed hope that GDP growth for 2014 would be above 3 percent. Like the Fed, most private-sector forecasts attribute the weakness in the first quarter to the unusually bad weather, and project that the economy will improve over the course of the year.

Nevertheless, the return to robust growth that Yellen envisioned not too long ago seems all but impossible now, even though it's also widely thought that the Fed will continue tapering its quantitative easing program, and be done with bond purchases altogether by the fall.

One economic indicator that has continued to improve even as others have disappointed is the unemployment rate. It fell to 6.3 percent in April, as the U.S. added 288,000 jobs.

On Friday, the Bureau of Labor Statistics will release the jobs numbers for May. The consensus is for roughly 215,000 new payroll jobs. The unemployment rate is expected to tick up to 6.4 percent, which could represent an improvement in labor force participation, rather than an increase in the number of jobless workers.

Monthly job gains have averaged 214,000 so far in 2014, up from 194,000 in 2013. It would make Yellen's management of the Fed's return to conventional monetary policy a lot simpler if that number continues to improve.

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Joseph Lawler

Economics Writer
The Washington Examiner