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Fed tapering could spur investment, increase labor demand

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Lindsey Knewstub

On Nov. 3, the Federal Reserve announced it would begin reducing the pace of its monthly bond purchases, a step toward more normal monetary policy.

Erica Groshen is senior economics advisor at the Cornell University School of Industrial and Labor Relations, as well as a former commissioner of the U.S. Bureau of Labor Statistics and vice president of the Federal Reserve Bank of New York. She says tapering should raise long-term interest rates and that could increase demand for labor.

Erica Groshen

Visiting Senior Scholar at the School of Industrial and Labor Relations

“As it accumulates slowly, this tapering should raise long-term interest rates. Thus, this move could spur investment in the short run as companies decide to take advantage of current low rates. That could increase demand for labor, further reducing unemployment and supporting wage growth.

“It could also quell some observers' fears of two bad and opposite outcomes: runaway inflation or a fragile, weakening recovery. The Fed's action and statement signal that they see these polar outcomes as very unlikely. Reducing these uncertainties can also promote sustainable job growth. 

“The main risk is that this is too soon, that the recovery is not yet robust enough, so investment and hiring will slow immediately. If that were the case though, they could dial back quickly.”

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