Will the Fed Intervention Create 700,000 Jobs?

In November, the Federal Reserve announced its quantitative easing initiative to purchase $600 billion of securities. The measure is an attempt to both raise inflation and increase employment. The program quickly became controversial. Inflation hawks worry that this additional intervention could cause prices to rise out of control in coming years, while advocates for the program insist that the Fed can drain money from the system quickly enough to prevent runaway inflation. Even if the latter claim is true, there's definitely some risk involved in the program. But will the benefits outweigh the risk? A new study by the Fed adds some detail to the argument.

According to a working paper (.pdf) written by the Federal Reserve Bank of San Francisco, the $600 billion purchase program will succeed in creating 700,000 jobs. This finding was noted by Fed Vice Chairwoman Janet Yellen at an economics conference over the weekend. In a speech she argued passionately in favor of the program, and used the statistic as proof of the good it will do. While it would be nice to try to evaluate the accuracy of this analysis, it's pretty impossible to do so.

For starters, try reading the paper. Unless you're a professional economist, then you probably won't get very far. It's highly technical, relying on statistic analysis. So while critics of the program can hope that an academic economist could take the time to examine all of the assumptions and math involved, it's no small task.

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But even if such a contrasting analysis were done, would it really matter? After all, how do you prove that any jobs were created or saved due to the Fed intervention? It's been noted in the past how difficult it is to even evaluate how many jobs were created or saved by fiscal stimulus measures. And much of that is direct spending, which is relatively easy to track. For monetary stimulus by the Fed, proving real world job gains is next to impossible.

Think about it. What business owner could say, "Yep. I wasn't going to hire anyone, but as soon as the Fed announced its purchase program, I realized I should hire someone," or "I was going to lay more people off until I heard about the Fed program. All that Treasury buying changed my mind." Obviously, no such sentences will ever be uttered. Instead, the only way to try to test if it worked is to rely on statistical assumptions and multipliers that imagine what how the economy might have looked like without it.

Of course, in theory, the measure should help. It should increase inflation expectations, which we may already be seeing reflected in higher nominal interest rates. It will likely keep the value of the dollar relatively low, which will be good for exports. It may also keep some pressure on longer-term interest rates, preventing them from rising too quickly. Those and other factors should increase economic activity.

The problem, however, is that there's no way to know for sure the precise effect this program will have on jobs. So it's a little strange to see the Fed publicize specific outcomes like the assertion in this report. While theory is always helpful to consider, as Fed's work becomes more transparent to the public, it may be expected to prove such claims, which it cannot possibly begin do for numerical outcomes like this. In a sense, that might result in specific number-driven predictions doing more harm than good. It's easy to talk about theoretical economic benefits caused by expansionary policy, but if the Fed can't prove specific claims it may lose some creditability.