we have no experience with the existing unorthodox monetary policy used since 2008, it is difficult to predict the impact on asset prices when the Federal Reserve starts to raise interest rates. Much will depend on the size of such increases. If interest rates increase at a slow pace, then asset price adjustments may not prove too unsettling. However, if the Federal Reserve raises interest rates significantly at some point in the future, as it did in the early 1990s, asset price adjustments might prove disruptive. They will need to be monitored closely going forward.
Labor Markets The US has one of the most flexible labor markets in the developed world. The Great Recession caused a steep increase in unemployment, with the jobless rate peaking at 10.0 percent in October 2009. That, however, was still slightly below the previous post-World War II peak of 10.8 percent, reached from November to December of 1982. In recent months, the unemployment rate has dropped more quickly than many had expected. Between
January 2013 and December 2014, it fell by 2.4 percentage points, from 8 percent to 5.6 percent. In April 2015, the rate had fallen further to 5.4 percent.
discouraged workers who had simply given up looking for a job. The rest of the 1.4 million had valid family or educational reasons to be outside the labor force.
The number of long-term unemployed, those who have been without work for 27 weeks or more, has fallen significantly both in terms of the actual number of people and the percentage of the unemployed. The number of people unemployed for more than 27 weeks totaled 3.9 million in December 2013. That number fell by nearly 1.1 million, to 2.8 million, by December 2014. In April 2015, the percentage of long-term unemployed as a percentage of all the unemployed fell to 29 percent, well below its peak of nearly 45.1 percent in September 2011.
The Banking Sector
In April 2015, another 2.1 million people were considered marginally attached to the labor force — which means that they had looked for work over the past 12 months, but not for the past four weeks. Of that 2.1 million, only 756,000 were considered
Unemployment Rate (%) 12 10 8 6 4 2 0
2008
2009
2010
2011
2012
2013
2014
2015
After the near meltdown of the financial system in 2008 following the bankruptcy of Lehman Brothers, the federal government and the Federal Reserve proved that they would not allow the banking sector or systematically important financial services firms to collapse. The $700 billion TARP program provided more than enough funds to support the banking system, as well as the two major mortgage lenders, AIG, Bear Stearns and the automakers. Although we do not yet have the final figures, indications to date suggest that the federal government is instead likely to have made a net profit. There is much discussion about the moral hazard issues relating to the idea of “too big to fail.� In that regard, it is essential to note the difference between a bank failure and a bank default. Depending on how a bank is wound down or how intervention is structured following its failure, it might still avoid defaulting on deposits or other financial instruments. In recent decades, the US banking industry has become ever more concentrated into fewer and fewer banks. In September 2014, the five then-largest US banks accounted for 44 percent of total bank assets in the country, equaling $6.8 trillion in total assets. Therefore, despite all the discussion about allowing banks to fail, given the size and importance of the largest US banks, and their systemic significance, it is unlikely that the largest ones will ever be allowed to default, at least on deposits. As such, despite the rhetoric, the US banking
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