|by Tim Mullaney, USA TODAY|
The Fed spit the bit. But then, it kind of had to.
Surprising nearly all
The premise for "tapering,'' or beginning the long process of unwinding several years of central bank policy that opened new frontiers in cheaper and easier credit, has been that a strengthening recovery doesn't need so much stimulus any more. Trouble is, the recovery — especially in housing — began to crack almost as soon as Fed chairman
Housing is, as it has been since 2007, the linchpin on which this economic cycle now turns.
The gap between the economy we have, with 7.3% unemployment, and the sub-6% unemployment rate we want can be explained almost entirely by the continued sluggishness of housing construction. Housing starts this year have averaged an annual pace of 906,000 new homes and apartments. At the same point in the 1983 and 2002 recoveries, the comparable number was about 1.7 million, big builder
At more than 4 jobs per new single-family home, that means a normal recovery in housing — not a 2005-like bubble — would add 3 million jobs, including both construction and spinoffs in housing-related retailers (think
Quick arithmetic tells you that 3 million new jobs would take 1.9 percentage points off the unemployment rate. Voila, 5.4%. Even if the population grows before we get there, and some discouraged workers begin to look for work again, we would still be under 6%.
But housing didn't cooperate. Housing starts went from an annual rate of 1 million-plus in March to 891,000 in August. New home sales dropped 13% in July.
In other words, the intellectual and economic foundation of the tightening plan began to go awry between May and today. Not a lot wrong, mind you — the housing market is nothing like it was in 2010. But the housing-led economic pickup that policy makers were counting on is not quite there. Without it, the plan to get unemployment down faces a big hurdle.
Many economists, including
But with the stumbles in recent months, the Fed needed to take out some insurance. And that's why the central bank didn't put the punch bowl on a higher shelf.
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