What do Siegfried and Roy have in common with Federal Reserve Chairman Janet Yellen? Both lean heavily on smoke and mirrors.

Shortly after the Bureau of Labor Statistics released unemployment data last month showing that joblessness had dropped below 6% for the first time since the 2008 crash, the Federal Reserve announced it would stop government bond purchases; Quantitative Easing is history.

The Federal Open Market Committee’s (FOMC) October 29 announcement states:

Information received since the Federal Open Market Committee met in September suggests that economic activity is expanding at a moderate pace. Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing. ….

The Committee judges that there has been a substantial improvement in the outlook for the labor market since the inception of its current asset purchase program. …. Accordingly, the Committee decided to conclude its asset purchase program this month.

To better understand what all that means in English, we need to back up a bit.

In 2012, Principal Global Investors economist Robin Anderson noted of Yellen:

Janet Yellen … is the latest in a string of Fed bigwigs to get behind an idea of using explicit inflation and unemployment targets to inform the market about the Fed’s future plans—forward guidance, in Fed-speak. ….

Essentially, the idea is to set up explicit thresholds for inflation and unemployment measures (the two mandates for the Fed) to help set expectations about the future of monetary policy if there should be a disconnect between the two.

In other words, the Fed leans on concrete inflation and unemployment data to form policy. That sounds intelligent, straightforward, and simple; however, it’s the kind textbook talk we should expect from someone living in a world of theory. Most of the time, the person making these statements has never been responsible for or had her job performance measured by a sales budget, expense budget, or achieving profit goals.

As I’ve mentioned before, in the words of Yogi Berra, “In theory there is no difference between theory and practice. In practice there is.”

Ms. Yellen quickly discovered that Yogi was right. In May 2014, during testimony before a joint Congressional committee, she said the 6.5% unemployment goal was being taken off the table, and she refused to give Congress any goals or timelines. She simply repeated that rates would remain near zero for a considerable time and would rise only when stronger economic conditions allowed.

Can you imagine the president of any major corporation standing up at a stockholder meeting and refusing to answer shareholders’ questions? “I’m not sure how much we will sell next year, nor do I know how much money we will earn. But when we get there I will tell you. You can trust me.”

Well, the day arrived, and Ms. Yellen says it’s time for bond buying to stop. And a few months down the road, the Federal Reserve is likely to begin slowly raising interest rates, even though she said she plans to keep interest rates low for a considerable period of time. Why? The unemployment rate, as reported by the BLS and shown in the graph below, is now below 6%.

Ms. Yellen has jumped and is now saying “that was our secret target.” This is her justification for stopping bond purchases. Hmm… sure looks like the Fed knows what it’s doing. Surely announcing that happy days are here again just before Tuesday’s midterm elections was a mere coincidence.

Take a look at the chart below showing the Labor Force Participation Rate as reported by the BLS on November 1.

I might be a 74-year-old with aging eyes, but even I can see that the line is going down. If true unemployment were going down, wouldn’t labor force participation be going up?

Here’s the answer: as MarketWatch columnist Howard Gold has mentioned, at a certain point the US economy could have a full rate of employment even though a large group of people is excluded from the workforce. It seems that day has come.

What does that mean for us? Take Ms. Yellen at her word; interest rates are not going to rise anytime soon.

On the Lighter Side

Follow us on Twitter @millersmoney.

Jo and I bought a new atomic clock that automatically sets the time, so we didn’t have to set our clock back over the weekend. It also projects the time and temperature on the ceiling. When I woke up on Sunday, it seemed that November had brought us winter weather; it was 42° F. outside.

You know it’s fall in Florida when the colors of license plates change. We’re already seeing increased traffic as our northern friends migrate south for the winter.

And finally…

A few cute puns from our good friend Sarah W.

  • You are stuck with your debt if … you can’t budge it.
  • A boiled egg is … hard to beat.
  • The professor discovered that her theory of earthquakes … was on shaky ground.

Until next week…