Fed realizes demographic challenges to effectiveness of monetary policies

The policymakers at the US Federal Reserve are increasingly waking up to the limitations of their monetary policies, and more so after the US election. When the unemployment rate in the United States is hovering at what the policymakers’ call long-term unemployment level at 4.9 percent, then how come Donald Trump’s promises of bringing back jobs could make so many Americans hopeful. Another puzzle is why the GDP and wage growth remained so stagnant along with inflation for so long despite record monetary easing and stock market levels.

Just by increasing the availability of more credit, people will not necessarily buy things they don’t need or afford in the longer run. Without a more inclusive growth, Fed’s policy would only benefit those, who are already at the top. Similarly, availability of credit to business will not always lead to an increase in investments or expansions, rather it would trickle the money again to the top.

Demographically, baby boomers generations, who were born after the world war II, arrived at working age during the 70’s and had driven demand during the 80’s and even in 90’s but as they grow old, they are the richest all around the world among generations but not ready to spend as much as they used to. The prosperity that the boomers enjoyed didn’t trickle down to later generations known as silent generations, Gen Xers, millennials, and post-millennials. Data shows, the weekly wage growth at constant dollars (1982-84) rose by just 1.2 percent in past 30 years to 2009, which is just 0.03 percent per annum.