Side-by-side, two worst case scenarios elicit very different reactions from the Federal Reserve.
I never congratulated Charles Evans, President of the Federal Reserve Bank of Chicago, for dissenting in the most recent FOMC meeting on behalf of the unemployed. ("Voting against the action was Charles L. Evans, who supported additional policy accommodation at this time.") I'm a big fan of the Evans Rule and am surprised inflation doves haven't been more vocal about it. As Goldman Sachs noted, "This was the first 'dovish' dissent since December 2007 (President Rosengren)." Given that unemployment has turned out to be worse than the Fed's projections at any time, it is about time that those who are worried about unemployment inside the Fed start making noise.
These first murmurs instead stand in contrast to the financial bailouts. Bloomberg just released a big story, based on its successful FOIA requests, that uncovered just how aggressive the Federal Reserve was with its emergency lender-of-last-resort powers. Kevin Drum, Matthew Yglesias, and Paul Krugman argue that what is really shocking is how total the rescue and backing of the financial sector was while the real economy was left to rot. As Krugman puts it, "The real scandal isn’t so much that those banks got rescued as that the rest of the population didn’t."
Part of why the bailouts were packaged the way they were was because Lehman Brothers' bankruptcy went a lot worse than the Federal Reserve's expectations of how the collapse of a major investment bank would go. When the collapse went far worse than its expectations, it reacted with maximum force.
Is there an equivalent story for unemployment? I'll try to graph this using the FRB's Summary of Economic Projections. From its FAQ: "Economic projections are collected from each member of the Board of Governors and each Federal Reserve Bank president four times a year, in connection with the Federal Open Market Committee's usual two-day meetings (typically held in January, April, June, and November)... The unemployment rate is the average civilian unemployment rate in the fourth quarter of a year."
Members of the Federal Reserve get together four times a year and project their expectations of unemployment for several years going forward. Below is that data plotted against the unemployment rate. Specifically, it has the average projected unemployment rate across the entire year and takes the average of the core tendencies that are reported as that rate. The actual unemployment is in bold red and projections from each point going forward are in shades of orange (click for larger image):
As you can see, there's no point in which unemployment was projected to be worse than it actually was. Especially in 2009-2010 -- the actual unemployment rate was significantly higher a year or two later. Here's a zoomed in view of the 09-11 range (click for larger image):
If we were to replace the FRB with a group of monkeys armed with darts, one would imagine that they would make at least a few projections above the actual rate of unemployment. It's funny -- the FRB tried to revise how bad unemployment is but doesn't revise it anywhere near enough to lower it to where the economy actually is.
So to recap: Lehman Brothers goes worse than the Federal Reserve's projection and the Fed goes to the most extreme lengths it can find to extend emergency lending. Every single unemployment number turns out to be worse than all of the Federal Reserve's projections, and it finds every excuse to look the other way. Only Charles Evans has the courage to say that we should let inflation go to 3 percent while unemployment is over 7 percent to catch up to trend growth. Amazing.
Mike Konczal is a Fellow at the Roosevelt Institute.