From The Wall Street Journal:
Shift in thinking comes as economy improves, jobless rate declines
By Shayndi Raice | January 16, 2017 8:00 a.m. ET
Federal Reserve officials increasingly say they don’t see a need for stimulative government tax and spending programs to boost short-term economic growth, reversing their stance during and after the Great Recession.
The shift is drawing attention as President-elect Donald Trump prepares to takes office on the promise of tax cuts and spending increases. He has promised annual U.S. economic growth of as much as 4%, double the 2% seen since the recession.
To several Fed officials, the need for such fiscal stimulus to raise overall demand is a thing of the past—the postcrisis period when unemployment peaked at 10%. Today, with joblessness down to 4.7%, they instead advocate targeted policies to spur long-term economic growth by raising productivity—or output per labor hour. These would include improving education and infrastructure, fostering research and encouraging new business formation.
“I would say at this point fiscal policy is not obviously needed to provide stimulus to help us get back to full employment,” Fed Chairwoman Janet Yellen said in December.
To some observers, the turnabout appears political: Fed officials supported fiscal stimulus during the Obama administration but don’t as Mr. Trump takes the helm. However, central bankers see this as a return to normal now that the economy has healed.
There’s a lot more at the link. And then Fed Governor Lael Brainard added her 2¢:
Central banker says fiscal deficits could increase without a lasting improvement in the economy’s long-term growth potential
By Harriet Torry | Updated Jan. 17, 2017 1:54 p.m. ETWASHINGTON—A top Federal Reserve official warned that government tax and spending programs aimed at boosting short-term growth could stoke inflation and cause the central bank to raise rates faster.
“[F]iscal expansions that affect only aggregate demand and are enacted when the economy is near full employment and 2% inflation are relatively less likely to sustainably boost economic activity and relatively more likely to be accompanied by increases in interest rates,” Fed governor Lael Brainard said Tuesday at the Brookings Institution in Washington.
If such fiscal policies cause the labor market to tighten more quickly, rate increases would “likely be more rapid than otherwise,” she said.
Ms. Brainard never mentioned President-elect Donald Trump by name, but spoke as he prepares to takes office Friday on the promise of tax cuts and spending increases. He has promised annual U.S. economic growth of as much as 4%, double the 2% seen since the recession.
Her remarks echoed those of other Fed officials who have said recently they don’t see a need for short-term fiscal stimulus with low unemployment and inflation rising toward their 2% target, but would welcome policies that enable the economy to produce more goods and services over the long term.
“Changes in fiscal policy that raise the level or growth rate of productivity or that induce greater labor-force participation and higher levels of skill and education in the workforce raise the nation’s productive capacity and result in more sustainable increases in output and living standards,” she said.
Two messages from the Federal Reserve, on two consecutive days? Yup, they’re trying to tell in the incoming President that if he goes for a big stimulus package, they’ll raise interest rates more.
I have noted previously that the International Monetary Fund, counting on some form of a stimulus plan coming from the incoming Trump Administration, are projecting growth rates of 2.3% in 2017 and 2.5% in 2018, while the Federal Reserve Board are projecting little fiscal policy change, and real GDP growth of 2.1% for 2017 and 2.0% in 2018.
This is one area in which I am in agreement with Janet Yellen and the Federal Reserve, though possibly for different reasons. I do not want to see any idiotic Keynesian “stimulus” plan; I was opposed to the huge deficits run up under President Obama, and I would be opposed to huge deficits run up under President Trump as well. I do not see stimulus spending as being effective any longer, because we have, in effect, been stimulating the economy all along, with huge deficits for many years, and the results have been so pathetic that 2% growth is now seen by some economists as the new normal.
Unlike the esteemed Dr Yellen, I do not believe we are close to full employment; I do not accept the ‘official’ U-3 unemployment rate, currently standing at 4.7%, as realistic. Rather, I look at the U-6 number, currently 9.2%, as being far more representative of the state of employment in this country.
What I would like to see is federal spending reduced, not increased — that’s probably a pipe dream! — and the spending that remains adjusted to something more productive. President Trump is correct that we need more infrastructure spending, but we need to couple that with reduced spending in other areas. In particular, welfare needs to be cut, drastically, and the Trump Administration has only a small window to get that done. Steps need to be taken to see to it that non-citizens are not receiving welfare.
Alas! Mr Trump has promised 3.5 to 4% real growth, and I’m worried that he’ll try more deficit spending to achieve it.