Memo to Skittish Bond Holders: Remember the Dual Mandate

The Federal Open Market Committee is not going to "taper," or slow the rate of its bond-purchases, in the short or medium term. The Federal Reserve Act ultimately governs the policy goals of the FOMC, and the Act contains a dual mandate to "maintain long run growth of the monetary and credit aggregates .... so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates."

Under Bernanke's leadership, the Committee has made an explicit commitment to maintain the bond-purchases of $85 billion per month until unemployment falls below 6.5% or inflation rises above 2.5%. Unemployment is currently running at 7.3% while headline inflation is approximating 1%.

Even the 7.3% unemployment rate is a misleading indicator of conditions in the labor market. Only Americans who are actively seeking employment are counted- the official number excludes those who have become discouraged and dropped out of the labor force due to lack of job opportunities. A more representative measure of the condition of the labor market is the civilian employment - population ratio, which peaked at 63.3% in the third quarter of fiscal year 2007 but which was 58.3% in October.

The current population of the United States is 313.9 million. If the same proportion of the population was employed today as in the third quarter of 2007, it would take the creation of another 15.695 million jobs; with that kind of employment gap and inflation average less than 1%, securities markets shouldn't expect a hike in rates nor a "taper" in quantitative easing in the near future.