A James Alexander post
As expected the FOMC made no change to its target rate. But we still think that the discussions at the FOMC are much more lively than they have been. Somehow, the “normalization” program pressed by the Fedborg and championed by the anti-prosperity inflation hawks has been delayed. Hooray!
We reckon that some of the newbies on the FOMC, particularly Neel Kashkari are shaking things up a bit. In an internal interview released the other day he made the refreshingly honest statement:
“Clearly what happens in global financial markets, as an example, will affect the U.S. economy. We can’t be blind to the fact that actions we take could affect global economic developments, which in turn will have an effect on our economy. We need to think about those feedback loops, and I believe that we do. It is one of the many inputs that we look at as we decide the optimum course of monetary policy.”
It is such a change from the stance of the Fed until recently that believes it operates somehow independently of the real world rather than a participant. Sure in the long run money is neutral, but in the short run, in fact for the last eight years, it has not been neutral. Monetary policy was way too tight in 2008 and thus caused the recession. And policy has continued way too tight so that the US has had a very prolonged recovery from that recession. And may now be so tight again as to cause a new recession.
Obsession with keeping projected inflation below 2% means a sword of damocles of potential monetary tightening has consistently hung over the market and made economic growth like pushing water uphill. And since mid-2014 the US has had passive tightening, and after December 2015 actual tightening.
The Fedborg is not responding well to the uppity newbies on the FOMC. It is spitting out bizarre statements like today’s “Labor market conditions have improved further …” when it’s own Changes in Labour Market Conditions Index clearly shows them worsening.
It tries to highlight that although nominal wage growth has cooled, real wages are much better.
“Growth in household spending has moderated, although households’ real income has risen at a solid rate”
Hasn’t it heard of the sticky wages problem? We had always thought that this key insight, perhaps the only insight, macroeconomics has had is rather a problem. Naively pointing to real wage growth in a deflation has long been regarded as a basic error – one which would lose a lot of marks if spotted in any undergraduate economics essay.
The Fedborg wants rates up because it believes rates are the tool for the implementation of monetary policy. Market Monetarists, like the market itself, believe expectations about future policy are the tool. The Fedborg doesn’t like expectations as it thinks they are harder to control, based on market consensus rather than a hard price like the Fed Funds Target Rate. Consensus is dangerously democratic or even anarchistic in that it may be different from the Fedborg’s own, autocratic, view of the world.
At least today the Fedborg has been shut up. We fear it won’t remain quiet forever and that any sustained market momentum will put it back on top. Hopefully, Kashkari and others might realise that this is also a feedback loop:
[market-strengthening -> Fed tightening talk -> market weakening -> Fed backing off -> market strengthening -> Fed tightening talk -> … ]
And a loop that needs breaking in order to achieve sustainable and stable growth – by a shift away from inflation targeting and towards nominal income growth targeting.