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Why Janet Yellen should worry about 6.7% unemployment

Paddy Hirsch Jan 10, 2014

Unemployment is down to 6.7 percent.

Ordinarily, that should be cause for celebration: The number of people out of work is falling, and we’re getting close to the magic number of 6.5.

A 6.5 percent unemployment rate has become the signal for the Federal Reserve to start unwinding some of its extraordinary support for the economy.

But the people over at the Fed aren’t popping corks just yet. Remember the Fed’s dual mandate: to ensure maximum employment and stable prices (control of interest rates is No. 3). And while  the unemployment number did indeed fall in December, very few jobs were created. As we’ve been hearing all day, this means that large numbers of people are dropping off the unemployment rolls. They’ve been out of work for so long, or there’s so little hoping of getting work, that they’ve given up looking.

And that’s a whole new headache for Janet Yellen. The unemployment rate was 7 percent in November. Having dropped to 6.7 percent in December, it’s not inconceivable that the rate could fall to 6.5 percent in January.

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Per Ben Bernanke’s pledge, that should trigger the Fed to begin dismantling all the extraordinary support the economy has had up until now. But the fact that we’re not creating many jobs should give Yellen pause. This month’s number implies we’re creating a large and growing body of long-term unemployed, and the “jobless” number is providing a smokescreen for what amounts to a timebomb at the heart of the American economy.

Yellen needs to be careful: Raising interest rates and withdrawing support for the economy at this point could be the match that lights the fuse.

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