Friday, September 25, 2015
Capital Markets Update
By Louis S. Barnes Friday, September 25th, 2015
Sunday evening… imagine 10,000 years ago on an open steppe, your tribe witness to the rising of an oversized full moon, colored burnt or bloody, then darkening altogether. What could it mean? Famine, drought, flood, sickness…?
It means the Fed’s going to tighten, that’s what. (I’ll miss the celestial show: the Broncos kick off at moonrise. No telling what it means for them.)
This week was thin for US economic data. From overseas, news of deepening slowdown in China, and emerging distress (Brazil), but we knew that. Markets jittered, waiting for next week’s flash reports of September’s economy. If weak, next Friday’s employment data will be our last chance for a stay of execution by Chair Yellen.
The biggest story of the week is the hardest to interpret: Chair Yellen spoke yesterday after markets had closed. Beware Fed Chairs speaking late! They do that to minimize damage to markets, giving them a sleepless night to think things over. But Yellen was the one who looked exhausted yesterday, nearly fainting during her speech, rather like a shaman struggling to explain to her tribe a dim and rusted moon.
Deciphering speeches by Fed Chairs is an art form. They all occasionally speak at length but intentionally saying nothing, and even when saying something we have to dig content from a mass of cherished academic filler.
“Massive” hardly describes Yellen’s speech (www.federalreserve.com). In 11-point type, the text is ten pages long, followed by eleven pages of bibliography and notes, and another nine of graphs. More than filler: Fed Chairs must lay out their reasoning to defend their ground not just for markets, but to keep under control other unruly Fed officials. This speech feels defensive. Trying to say, don’t argue with me. Her predecessors kept the Fed governors and regional presidents under control by force of personality — and more important, by sheer intellect. Volcker was longer on muscle, and ultimately faced a revolt hastening his departure. Why embarrass yourself arguing economics with Greenspan or Bernanke? (Too bad, in the case of the former.)
Yellen’s colleagues are clearly restive. Perhaps half of her colleagues are more eager to lift off than she, and have had far too much to say about their disagreement.
Boiled down, here is her content. “…Two key points: that inflation is now much more stable than it used to be, and that it is currently running at a very low level.” Right. So, where did the old-time inflation come from, and go? “… In the late 1960s and 1970s… chronically overheated labor and product markets, the effects of the energy and food price shocks, and the emergence of an “inflationary psychology….”
Where is the missing inflation now? “…The current near-zero rate of inflation can mostly be attributed to the temporary effects of falling prices for energy and non-energy imports… moving back to 2 percent, accompanied by a temporary decline in unemployment slightly below the median estimate expected to prevail in the longer run.” That is a declaration of war. The Fed will soon be in the business of raising the unemployment rate, no matter how gentle this line appears: “The precise timing of the first increase… should have only minor implications for financial conditions…What matters… is the entire trajectory of short-term interest rates.”
In those lines she dismisses all new-age concerns and sticks to orthodox faith: nothing here or overseas matters as much as the job market. Wish her and us luck. Come off zero, fine. Ignore a badly impaired half of US citizens suppressing demand, and profound change in the global economy at your peril and ours. Much as I respect Yellen, instead of this whale-speech, we could have used a discussion of recent Fed errors in forecasting, and market rates at huge variance from the Fed’s intentions.
Related to the Fed by our need for good leadership, this week we learned of VW’s ethical perfidy, and John Boehner’s resignation. In some ways unlikable, and anyone to the left disliking his politics, Boehner reached the one job he ever wanted, used it to preserve functioning government, and has resigned in disgust at extremists.
We must do better than this.
Sunday evening… imagine 10,000 years ago on an open steppe, your tribe witness to the rising of an oversized full moon, colored burnt or bloody, then darkening altogether. What could it mean? Famine, drought, flood, sickness…?
It means the Fed’s going to tighten, that’s what. (I’ll miss the celestial show: the Broncos kick off at moonrise. No telling what it means for them.)
This week was thin for US economic data. From overseas, news of deepening slowdown in China, and emerging distress (Brazil), but we knew that. Markets jittered, waiting for next week’s flash reports of September’s economy. If weak, next Friday’s employment data will be our last chance for a stay of execution by Chair Yellen.
The biggest story of the week is the hardest to interpret: Chair Yellen spoke yesterday after markets had closed. Beware Fed Chairs speaking late! They do that to minimize damage to markets, giving them a sleepless night to think things over. But Yellen was the one who looked exhausted yesterday, nearly fainting during her speech, rather like a shaman struggling to explain to her tribe a dim and rusted moon.
Deciphering speeches by Fed Chairs is an art form. They all occasionally speak at length but intentionally saying nothing, and even when saying something we have to dig content from a mass of cherished academic filler.
“Massive” hardly describes Yellen’s speech (www.federalreserve.com). In 11-point type, the text is ten pages long, followed by eleven pages of bibliography and notes, and another nine of graphs. More than filler: Fed Chairs must lay out their reasoning to defend their ground not just for markets, but to keep under control other unruly Fed officials. This speech feels defensive. Trying to say, don’t argue with me. Her predecessors kept the Fed governors and regional presidents under control by force of personality — and more important, by sheer intellect. Volcker was longer on muscle, and ultimately faced a revolt hastening his departure. Why embarrass yourself arguing economics with Greenspan or Bernanke? (Too bad, in the case of the former.)
Yellen’s colleagues are clearly restive. Perhaps half of her colleagues are more eager to lift off than she, and have had far too much to say about their disagreement.
Boiled down, here is her content. “…Two key points: that inflation is now much more stable than it used to be, and that it is currently running at a very low level.” Right. So, where did the old-time inflation come from, and go? “… In the late 1960s and 1970s… chronically overheated labor and product markets, the effects of the energy and food price shocks, and the emergence of an “inflationary psychology….”
Where is the missing inflation now? “…The current near-zero rate of inflation can mostly be attributed to the temporary effects of falling prices for energy and non-energy imports… moving back to 2 percent, accompanied by a temporary decline in unemployment slightly below the median estimate expected to prevail in the longer run.” That is a declaration of war. The Fed will soon be in the business of raising the unemployment rate, no matter how gentle this line appears: “The precise timing of the first increase… should have only minor implications for financial conditions…What matters… is the entire trajectory of short-term interest rates.”
In those lines she dismisses all new-age concerns and sticks to orthodox faith: nothing here or overseas matters as much as the job market. Wish her and us luck. Come off zero, fine. Ignore a badly impaired half of US citizens suppressing demand, and profound change in the global economy at your peril and ours. Much as I respect Yellen, instead of this whale-speech, we could have used a discussion of recent Fed errors in forecasting, and market rates at huge variance from the Fed’s intentions.
Related to the Fed by our need for good leadership, this week we learned of VW’s ethical perfidy, and John Boehner’s resignation. In some ways unlikable, and anyone to the left disliking his politics, Boehner reached the one job he ever wanted, used it to preserve functioning government, and has resigned in disgust at extremists.
We must do better than this.
Friday, September 18, 2015
Capital Markets Update
By Louis S. Barnes Friday, September 18th, 2015
Well, thank heavens that’s over.
Not. It’s never over. Which is a good place to begin. Start by sorting Wall Street propaganda and bad theories in general from clear thinking about what’s actually happening and ahead.
Bad idea number one is just silly, not damaging: the Fed’s September pass creates uncertainty. There is always a market crew perched in highchairs, hammering sippy-cups and rubber spoons and squalling, “Now! I wanna know NOW! When! How much!” Pay no attention to these overage toddlers. Uncertainty is the deal, markets and life. It’s not the Fed’s job to bring certitude. There isn’t any. Your Mommy and Daddy are the center of the universe when you are two, but even as teenagers most of us get the glimmer that we’re on our own.
Bad idea number two is corrosive. Now a semi-political issue found commonly right-side, among anti-government types but also from pure-market libertarians: we’re better off without the Fed. Or with a mechanical Fed.
Third is worse. Since all this QE and ZIRP (zero interest rate policy) has not brought a strong recovery, the Fed’s experiments have failed and never should have been tried in the first place. Reality: a strong recovery would have been nice, but the Fed’s objective was to prevent depression. I can’t prove that it did, but it’s evident that we didn’t have one (yet), and none of these arch critics can prove what would have happened if the Fed had been inert. I can testify to the Fall 2008 mass of soiled undies, and the great relief at the QE announcement in that Thanksgiving week.
Worst of all are the authoritative people in pinstripes who testify the economy would be better off with higher rates. This is financial creationism. The sort of people who think Fred Flintstone had a pet dinosaur. Yes, ZIRP has hurt savers and pension funds and others reliant on passive income, but the benefit of ZIRP to the rest of the economy far outweighs those sectors. Go further: find one case in any nation at any time in which a bad economy was rescued by higher interest rates.
To the heart of the matter: the Fed is peripheral, now. By the way, so is the stock market. Oh, if it crashed the Fed would intervene in some ways, as in 1987, but it’s not the center of the universe, either. Markets do matter to the Fed, but centrality changes from time to time. In 2008 it was the collapse of mortgage credit. Today you can bet that Fed staffers not used to the job are watching international credit and liquidity as never before.
You can bet because the Fed said so on Thursday: “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” The Fed has not given such weight to overseas conditions in nearly 20 years, but during the 1997-98 Asian-Russian meltdown, Greenspan gave us this: “It is just not credible that the United States can remain an oasis of prosperity unaffected by a world that is experiencing greatly increased stress.” We dodged that bullet in part because the Fed eased. At the time, a bubbling stock market needed a dose of tightening. Welcome to life at the Fed: pick your poison, every day.
The stock market may be overbought; if so, by excessive faith in emerging economies. Cars are overbought. Student loans. Nothing else. Home mortgages outstanding grew in Q2 for the first time in a decade, by 0.004%. Total bank credit is growing at the slowest pace in two years. The Fed has been engaged in that time in some closet tightening, and the outside world has tightened a great deal for the Fed.
Stick with Clinton’s Law: “It’s the economy….” Unfortunately, no longer just ours. We must watch the whole world while its second-largest economy misrepresents its condition and pursues guaranteed-to-fail top-down control. Thus we’re all dependent on inferential sources about China, from Chair Yellen all the way to our own highchairs.
The Fed will follow, not lead.
Well, thank heavens that’s over.
Not. It’s never over. Which is a good place to begin. Start by sorting Wall Street propaganda and bad theories in general from clear thinking about what’s actually happening and ahead.
Bad idea number one is just silly, not damaging: the Fed’s September pass creates uncertainty. There is always a market crew perched in highchairs, hammering sippy-cups and rubber spoons and squalling, “Now! I wanna know NOW! When! How much!” Pay no attention to these overage toddlers. Uncertainty is the deal, markets and life. It’s not the Fed’s job to bring certitude. There isn’t any. Your Mommy and Daddy are the center of the universe when you are two, but even as teenagers most of us get the glimmer that we’re on our own.
Bad idea number two is corrosive. Now a semi-political issue found commonly right-side, among anti-government types but also from pure-market libertarians: we’re better off without the Fed. Or with a mechanical Fed.
Third is worse. Since all this QE and ZIRP (zero interest rate policy) has not brought a strong recovery, the Fed’s experiments have failed and never should have been tried in the first place. Reality: a strong recovery would have been nice, but the Fed’s objective was to prevent depression. I can’t prove that it did, but it’s evident that we didn’t have one (yet), and none of these arch critics can prove what would have happened if the Fed had been inert. I can testify to the Fall 2008 mass of soiled undies, and the great relief at the QE announcement in that Thanksgiving week.
Worst of all are the authoritative people in pinstripes who testify the economy would be better off with higher rates. This is financial creationism. The sort of people who think Fred Flintstone had a pet dinosaur. Yes, ZIRP has hurt savers and pension funds and others reliant on passive income, but the benefit of ZIRP to the rest of the economy far outweighs those sectors. Go further: find one case in any nation at any time in which a bad economy was rescued by higher interest rates.
To the heart of the matter: the Fed is peripheral, now. By the way, so is the stock market. Oh, if it crashed the Fed would intervene in some ways, as in 1987, but it’s not the center of the universe, either. Markets do matter to the Fed, but centrality changes from time to time. In 2008 it was the collapse of mortgage credit. Today you can bet that Fed staffers not used to the job are watching international credit and liquidity as never before.
You can bet because the Fed said so on Thursday: “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” The Fed has not given such weight to overseas conditions in nearly 20 years, but during the 1997-98 Asian-Russian meltdown, Greenspan gave us this: “It is just not credible that the United States can remain an oasis of prosperity unaffected by a world that is experiencing greatly increased stress.” We dodged that bullet in part because the Fed eased. At the time, a bubbling stock market needed a dose of tightening. Welcome to life at the Fed: pick your poison, every day.
The stock market may be overbought; if so, by excessive faith in emerging economies. Cars are overbought. Student loans. Nothing else. Home mortgages outstanding grew in Q2 for the first time in a decade, by 0.004%. Total bank credit is growing at the slowest pace in two years. The Fed has been engaged in that time in some closet tightening, and the outside world has tightened a great deal for the Fed.
Stick with Clinton’s Law: “It’s the economy….” Unfortunately, no longer just ours. We must watch the whole world while its second-largest economy misrepresents its condition and pursues guaranteed-to-fail top-down control. Thus we’re all dependent on inferential sources about China, from Chair Yellen all the way to our own highchairs.
The Fed will follow, not lead.
Friday, September 11, 2015
Capital Markets Update
By Louis S. Barnes Friday, September 11th, 2015
The financial world is paralyzed, waiting for the Fed next Thursday.
At the outset, hang on tight to one thing: the US economy is doing so well that if it were not for the rest of the world the Fed would have begun liftoff months or even years ago. We are not growing fast, our new GDP speed limit only about 2%, but jobs are plentiful, housing is entering a growth phase beyond recovery, and only wages are sticky. Wages and therefore inflation may stay stuck, but with unemployment crossing below 5% a 0% Fed is inappropriate.
My vote for next Thursday: lift .25% and see what happens. This fitful go/no-go and Groundhog Day debate is distracting from important things, like football.
The Fed may hold off because inflation forces are all pulling downward, and because there is no reliable way to measure the future impact on the US of an outside world in trouble. In the 1997-1998 “Asian Contagion,” the Fed panicked about global recession, but it turned out that overseas trouble was a benefit here, and the Fed’s easing poured gasoline on a stock-market bonfire. This time is different.
Europe is so sick that the ECB this week guaranteed additional and extended QE.
Then the BRICS, the emerging darlings of finance, investment, and bond and stock huckstering. “B” for Brazil, which this week submerged to junk bond status. Its currency is worth about half its value two years ago. Its government and upper-crust leadership have been exposed as completely corrupt. Its over-reliance on commodity exports has produced a structural fracture with no prospect of cyclical recovery. At some point a dead-varmint bounce, and social unrest likely.
“R” for Russia. Czar Vladimir made a pact with Russia’s worst impulses, and the bill is due. A gangster state, in which any successful entrepreneur will pay protection until a goon steals the whole business. All the weakness of any petro-state, with an otherwise shriveled economy, petro production itself starved of investment, and petro prices less than half the level necessary to keep the gangs going. Belly-crawling to China has been fruitless. Oil under $50, Vladimir has a couple of years before… the knock at his door?
“I” for India. The bright spot. Still growing, but the rupee in bad trouble because markets for its exports are in trouble. Its deepest weakness: the caste system and corruption blockade any prospect of widespread modernization and population control. May get some cyclical rebound, but structural issues are intractable.
Skipping to “S” for South Africa. Another busted commodity state, little of export merit otherwise, the rand in free-fall. Unresolved social issues.
Then “C” for China. Everybody gets the black box: the world’s second-largest economy, 1.3 billion people, the focus and funnel of world trade, but so thoroughly deceitful about its data that the world can’t tell what’s going on inside. And that of course is what’s wrong inside. China is not a gangster state like Russia — it has its murky clans and the rotten Party, but its self-theft is for public good. China’s black-suit and shoe-polish-hair leadership is a collective control freak, perfectly understandable given China’s several-thousand-year tendency to fly apart. Its command economy is not Soviet-style incompetence — China truly intends a meritocracy.
Fatal for its plans: last week the lead reporter for a top China business journal was arrested and charged for the crime of “independent inquiry.” China is hitting the great wall of social capital. Markets cannot function without a free flow of information. In a healthy society, business conversations always overlap with government policy consideration and open political debate. No modern economy can function without a reliable, fair, and independent legal system. Command economies always fail: you cannot order people and businesses to be flexible while simultaneously forbidding flexibility. You can get only so far with the hammer, and then it’s the problem.
China is not likely to hard-land, but its supercharged leadership days are done.
So, if you’re Chair Yellen, you want to tighten into that?
Probably.
The financial world is paralyzed, waiting for the Fed next Thursday.
At the outset, hang on tight to one thing: the US economy is doing so well that if it were not for the rest of the world the Fed would have begun liftoff months or even years ago. We are not growing fast, our new GDP speed limit only about 2%, but jobs are plentiful, housing is entering a growth phase beyond recovery, and only wages are sticky. Wages and therefore inflation may stay stuck, but with unemployment crossing below 5% a 0% Fed is inappropriate.
My vote for next Thursday: lift .25% and see what happens. This fitful go/no-go and Groundhog Day debate is distracting from important things, like football.
The Fed may hold off because inflation forces are all pulling downward, and because there is no reliable way to measure the future impact on the US of an outside world in trouble. In the 1997-1998 “Asian Contagion,” the Fed panicked about global recession, but it turned out that overseas trouble was a benefit here, and the Fed’s easing poured gasoline on a stock-market bonfire. This time is different.
Europe is so sick that the ECB this week guaranteed additional and extended QE.
Then the BRICS, the emerging darlings of finance, investment, and bond and stock huckstering. “B” for Brazil, which this week submerged to junk bond status. Its currency is worth about half its value two years ago. Its government and upper-crust leadership have been exposed as completely corrupt. Its over-reliance on commodity exports has produced a structural fracture with no prospect of cyclical recovery. At some point a dead-varmint bounce, and social unrest likely.
“R” for Russia. Czar Vladimir made a pact with Russia’s worst impulses, and the bill is due. A gangster state, in which any successful entrepreneur will pay protection until a goon steals the whole business. All the weakness of any petro-state, with an otherwise shriveled economy, petro production itself starved of investment, and petro prices less than half the level necessary to keep the gangs going. Belly-crawling to China has been fruitless. Oil under $50, Vladimir has a couple of years before… the knock at his door?
“I” for India. The bright spot. Still growing, but the rupee in bad trouble because markets for its exports are in trouble. Its deepest weakness: the caste system and corruption blockade any prospect of widespread modernization and population control. May get some cyclical rebound, but structural issues are intractable.
Skipping to “S” for South Africa. Another busted commodity state, little of export merit otherwise, the rand in free-fall. Unresolved social issues.
Then “C” for China. Everybody gets the black box: the world’s second-largest economy, 1.3 billion people, the focus and funnel of world trade, but so thoroughly deceitful about its data that the world can’t tell what’s going on inside. And that of course is what’s wrong inside. China is not a gangster state like Russia — it has its murky clans and the rotten Party, but its self-theft is for public good. China’s black-suit and shoe-polish-hair leadership is a collective control freak, perfectly understandable given China’s several-thousand-year tendency to fly apart. Its command economy is not Soviet-style incompetence — China truly intends a meritocracy.
Fatal for its plans: last week the lead reporter for a top China business journal was arrested and charged for the crime of “independent inquiry.” China is hitting the great wall of social capital. Markets cannot function without a free flow of information. In a healthy society, business conversations always overlap with government policy consideration and open political debate. No modern economy can function without a reliable, fair, and independent legal system. Command economies always fail: you cannot order people and businesses to be flexible while simultaneously forbidding flexibility. You can get only so far with the hammer, and then it’s the problem.
China is not likely to hard-land, but its supercharged leadership days are done.
So, if you’re Chair Yellen, you want to tighten into that?
Probably.
Friday, September 4, 2015
Capital Markets Update
By Louis S. Barnes Friday, September 4th, 2015
I have many friends who hang on every word from rich guys on Wall Street: mutual and hedge fund managers, securities firm economists and pooh-bahs, and just plain rich guys who got rich by playing on the Street.
But these sources are either salespeople, or winners who have little to say about the role of good fortune in their fortunes.
The core of good information today is the central bankers themselves. For good or ill we are in an era — an epoch, not a transient moment — in which the central bankers matter more than markets. Yet, in the greatest oddity of our time the central bankers appear to be powerless to meet their own forecasts.
The Fed speaks with many voices, and most of those are egos with microphones. The Fed officials closest to the Chair and making up the governing majority speak rarely and carefully. Several regional Fed presidents would be better served not to speak at all (which was the case in the old days) — Bullard, George, Lacker, Mester, Plosser, Fisher, Kocherlakota…. A few of the regionals are extraordinary.
Eric Rosengren, Boston Fed, in August 2008 delivered the best single insight of the last decade. The Fed had been easing strongly both in rate and liquidity for a year, but credit markets seemed on a very dangerous path, falling out of the support by the Fed. Rosengren said that the deepening credit-market panic had “more than offset all Fed easing to date.” Nice call. Lehman and the economy failed the next month.
Rosengren spoke this week. He saw two conditions necessary for Fed liftoff: labor market improvement, which “has largely been met,” and second, “reasonable confidence that PCE inflation will move back to its 2% objective over the medium term.”
For that second condition, “the data have not been as clear cut.” Then, making him the first Fed official to acknowledge failure so plainly: “You might say the incoming data have not cooperated with the forecasts.”
He followed that with the zinger which tells us where we really are: “Nonetheless… we will reach 2% inflation if one sees the US economy as likely to continue growing above its potential.” Emphasis on continue is mine. Chair Yellen has used exactly the same phrase repeatedly. That’s the Fed saying current GDP growth in the 2-2.5% range is unsustainably too fast and the Fed intends to lean against it, the only question how soon and how hard. Everyone I know feels as though the US is just pooping along at stall speed, the economic quality of life improving for less than one-third of us.
But the Fed is utterly focused on the Phillips Curve — the inflationary effect of a too-low unemployment rate. Even if wages are growing too little now, upward tension is accumulating. Rosengren did recite his doubts about overheating, again the only Fed official to note “indications of a much weaker global economy.”
Rosengren’s conclusion gives us the first clear long-term forecast. The Fed’s 3.75% as the long-term target for fed funds is not normalized in the sense of open-ended stability, but the endpoint of a tightening cycle resulting in the recession necessary to raise the unemployment rate from the Phillips inflation danger zone. Rosengren’s analysis uses three years from the first tightening to the end, a historical pattern, although from 0% today a very low slope.
Whether the Fed lifts off next month is immaterial. Rosengren gave us the plan.
Here’s how crazy all of this is: I can’t tell if the markets care what the Fed does. The Fed has its plan, but markets are properly mesmerized by an outside world falling apart, not a mere cyclical deterioration soon to turn, but structural. Every central bank ex-US is hosing cash into local economies with all the effect of transfusing a patient who has an open artery in the other arm.
This holiday weekend take time to give thanks for the exceptional flexibility which has allowed the US the luxury of low-slope recovery and a threatening Fed, and thanks to the rest of the world for sending money here to keep our long-term rates low.
I have many friends who hang on every word from rich guys on Wall Street: mutual and hedge fund managers, securities firm economists and pooh-bahs, and just plain rich guys who got rich by playing on the Street.
But these sources are either salespeople, or winners who have little to say about the role of good fortune in their fortunes.
The core of good information today is the central bankers themselves. For good or ill we are in an era — an epoch, not a transient moment — in which the central bankers matter more than markets. Yet, in the greatest oddity of our time the central bankers appear to be powerless to meet their own forecasts.
The Fed speaks with many voices, and most of those are egos with microphones. The Fed officials closest to the Chair and making up the governing majority speak rarely and carefully. Several regional Fed presidents would be better served not to speak at all (which was the case in the old days) — Bullard, George, Lacker, Mester, Plosser, Fisher, Kocherlakota…. A few of the regionals are extraordinary.
Eric Rosengren, Boston Fed, in August 2008 delivered the best single insight of the last decade. The Fed had been easing strongly both in rate and liquidity for a year, but credit markets seemed on a very dangerous path, falling out of the support by the Fed. Rosengren said that the deepening credit-market panic had “more than offset all Fed easing to date.” Nice call. Lehman and the economy failed the next month.
Rosengren spoke this week. He saw two conditions necessary for Fed liftoff: labor market improvement, which “has largely been met,” and second, “reasonable confidence that PCE inflation will move back to its 2% objective over the medium term.”
For that second condition, “the data have not been as clear cut.” Then, making him the first Fed official to acknowledge failure so plainly: “You might say the incoming data have not cooperated with the forecasts.”
He followed that with the zinger which tells us where we really are: “Nonetheless… we will reach 2% inflation if one sees the US economy as likely to continue growing above its potential.” Emphasis on continue is mine. Chair Yellen has used exactly the same phrase repeatedly. That’s the Fed saying current GDP growth in the 2-2.5% range is unsustainably too fast and the Fed intends to lean against it, the only question how soon and how hard. Everyone I know feels as though the US is just pooping along at stall speed, the economic quality of life improving for less than one-third of us.
But the Fed is utterly focused on the Phillips Curve — the inflationary effect of a too-low unemployment rate. Even if wages are growing too little now, upward tension is accumulating. Rosengren did recite his doubts about overheating, again the only Fed official to note “indications of a much weaker global economy.”
Rosengren’s conclusion gives us the first clear long-term forecast. The Fed’s 3.75% as the long-term target for fed funds is not normalized in the sense of open-ended stability, but the endpoint of a tightening cycle resulting in the recession necessary to raise the unemployment rate from the Phillips inflation danger zone. Rosengren’s analysis uses three years from the first tightening to the end, a historical pattern, although from 0% today a very low slope.
Whether the Fed lifts off next month is immaterial. Rosengren gave us the plan.
Here’s how crazy all of this is: I can’t tell if the markets care what the Fed does. The Fed has its plan, but markets are properly mesmerized by an outside world falling apart, not a mere cyclical deterioration soon to turn, but structural. Every central bank ex-US is hosing cash into local economies with all the effect of transfusing a patient who has an open artery in the other arm.
This holiday weekend take time to give thanks for the exceptional flexibility which has allowed the US the luxury of low-slope recovery and a threatening Fed, and thanks to the rest of the world for sending money here to keep our long-term rates low.
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