Economic Review
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In the spring of 2004, there was widespread expectation in financial markets that the Federal Reserve would shortly begin the process of raising its federal funds rate target back toward a more normal level. At the time, there was considerable concern that removing policy accommodation could lead to a sharp rise in long-term interest rates that might roil financial markets or slow the economic recovery. Much of this concern was based on the sizable increases in long-term rates that occurred when the Federal Reserve tightened policy in 1994-95 and 1999-2000. In contrast to the conventional wisdom, however, longer-term rates actually declined as the funds rate target rose. Indeed, in August 2005, after the Federal Reserve had raised its federal funds rate target from 1 percent to 3˝ percent, the yield on the benchmark 10-year Treasury note remained below its level at the onset of policy tightening. This surprising behavior of long-term rates has been labeled a “conundrum” by Federal Reserve Chairman Greenspan and many financial market participants, and considerable effort has been made to understand the causes of the conundrum and its implications for monetary policy. Kozicki and Sellon provide a framework for understanding the relationship between monetary policy and the yield curve that can be used to analyze the behavior of long-term rates during periods of monetary policy tightening. The authors use the framework to examine two recent episodes of policy tightening, in 1999-2000 and 2004-05. The analysis reveals that the conundrum period is highly unusual, but it also suggests that the relationship between monetary policy and the yield curve is quite complex and highly variable over time. During Alan Greenspan’s years at the helm of the Federal Reserve System, the global economy has undergone significant structural change and withstood a variety of financial and economic shocks. In addition to helping steer the global economy through such challenges, Chairman Greenspan has been at the center of discussions on monetary policy ideas and issues. To honor Alan Greenspan’s service, the Federal Reserve Bank of Kansas City sponsored an economic symposium to explore several of these ideas and issues that will continue to challenge central bankers for years to come. The symposium was held at Jackson Hole, Wyoming, August 25-27. Kahn highlights the principal issues raised at the symposium, which brought together a distinguished group of central bank officials and academic, policy, and business economists to discuss these important challenges and identify lessons for the future. Immigration from abroad has increased dramatically since the 1960s, as workers from less developed countries have moved to the U.S. in search of higher wages. The new wave of immigration has reignited the debate about the impact of immigration on the economy. One way immigration affects the economy is through the labor market. At the national level, immigration is widely believed to harm native workers with similar skills by reducing their wages or their probability of obtaining a job. But immigration can also alter the allocation of workers across markets—either for better or for worse. If immigrants gravitate to markets with unusually strong labor demand, they will reduce differences in wages and unemployment between strong and weak markets, making it unnecessary for as many native workers to move. On the other hand, if immigrants move to markets with average or below-average labor demand, they may create an excess supply of workers with similar skills in these markets. Some natives may move out of these markets to avoid a cut in wages, and other natives may avoid these markets even if they would be well suited to living there on other grounds. Keeton and Newton shed new light on the impact of immigration on the allocation of workers across markets by examining migration flows during the second half of the 1990s. They conclude that the impact of immigration on the geographic allocation of labor is neither as harmful as immigration opponents sometimes suggest, nor as beneficial as immigration supporters sometimes claim. In January 2005, after more than three years of sluggish employment growth, the U.S. economy finally recovered the jobs lost during the 2001 recession. Baffled by such a delayed rebound in payrolls, many speculated about the cause. Inevitably, observers compared the 2001 and 1991 recoveries, both widely considered to have been jobless. Schreft and Singh showed previously that one common feature of the first year of the jobless recoveries was the greater use of just-in-time employment practices. They also speculated that the greater availability of just-in-time employment practices contributed to the recoveries’ lack of job growth. This explanation of delayed hiring is termed the “wait-and-see hypothesis.” Flexible hiring practices allow firms to more easily adjust output in the short term without hiring full-time, potentially permanent workers. This practice is especially effective around the troughs of business cycles, when there is uncertainty about the strength of the recovery. As a result, firms are willing to wait to hire until they see sufficient improvement in business conditions to justify expanding payrolls. Schreft, Singh, and Hodgson take a longer-term perspective, considering the behavior of employment in the first three years of the jobless recoveries. They also describe how a wait-and-see approach to hiring can contribute to such recoveries. Back to top Economic Review home
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