The United States’ gross domestic product grew by a paltry 1.6% in 2016, the worst year since 2011, and that growth rate was lower than the Federal Reserve Board’s projection of a 1.9% growth rate, made when the year was already 11½ months over. The growth rate for just the fourth quarter of 2016 was only 1.9%
So, naturally, if we get a couple months of (relatively) good economic news, the response of the Federal Reserve ought to be to try to slow down growth, right? From The Wall Street Journal:
A robust employment report cements expectations the Federal Reserve will raise rates next week
By Jeffrey Sparshott | March 10, 2017 9:42 am ET
U.S. employers added a seasonally adjusted 235,000 jobs and the unemployment rate ticked down to 4.7% in February, the Labor Department said on Friday. Underlying details on labor force participation and wages were relatively strong, likely adding to expectations the Federal Reserve will raise its benchmark interest rate at its policy meeting next week.
Here are initial reactions from economists and analysts:
- “The U.S. labor market is running hot, tight and past full employment. The stage is set for a noticeably improved wage picture in 2017 and with the improvement in the underlying economic fundamentals, the Fed will almost surely hike rates by 25 basis points at its March 15 meeting. With the labor market this strong, the economy is not only capable of absorbing the 75 basis points that the Fed forecast implies, the hawks on the committee likely have gained the initiative, opening the way for another 25 basis points on top of that by the end of the year.” — Joseph Brusuelas, RSM US
- “A March hike is a done deal. The report was the last piece in the puzzle and there is nothing here that will make the Fed want to step back from their recent signaling. The challenge for the Fed now is to ensure that the market doesn’t start extrapolating a much more rapid series of hikes. Investors are comfortable with three hikes this year but any suggestion of four will probably cause a wobble.” — Luke Bartholomew, Aberdeen Asset Management
- “It’s too early to tell if the pickup in job growth in early 2017 is due to the Trump administration. Given that few actual policies have changed, it could be that businesses are feeling more positive in the early days of the new administration; this might be one reason for the big jump in manufacturing jobs in February. But the underlying trends for the economy now are similar to those in 2016: more jobs and higher wages boosting consumer income and spending, and an improving housing market.” — Gus Faucher, PNC Financial Services
It is that last quote, from Gus Faucher of PNC Financial Services,1 which caught my eye. He stated that “the underlying trends for the economy now are similar to those in 2016,” but last year was the slowest rate of economic growth in five years. Why, then, would Chairman Janet Yellen and the Board of Governors choose a policy designed to slow down economic growth?
The FOMC justified its policies back in December of 2015, when it “decided that economic conditions and the economic outlook warranted the commencement of the policy normalization process and the Committee voted to raise the target range for the federal funds rate, the first change since December 2008.” Trouble is, the actual results did not match the economic outlook on which the Board took its decisions. They got it wrong in December of 2015, and got it wrong again last December, the chart at the right having been taken from the Fed’s projections.
But, as always, there’s more to it. We noted, back on inauguration day, that the Fed saw little need for further economic stimulus, and that I agreed with them, though for a different reason: I do not believe that the Keynesian notion of economic stimulus is a viable one any longer,2 and believe that the continuation of the huge deficit spending of the Obama Administration is ultimately harmful.
Nevertheless, any stimulus program put in place is a decision for the Congress and President, not the Fed. Both Dr Yellen and Fed Governor Lael Brainard have indicated that the FOMC might seek to raise interest rates if President Trump’s policies focus on stimulus, Dr Brainard saying, on January 17th:
[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.
Really? The New York Times profiled Dr Brainard last July, saying:
Lael Brainard is poised to win another round this week in her fight for the Federal Reserve to keep interest rates low.
Ms. Brainard, a Fed governor in Washington since 2014, has emerged over the last year as a leading advocate for patience, pressing the case that low rates are important for domestic economic growth and for global stability.
The Fed is expected to announce on Wednesday, after a two-day meeting of its policy-making committee, that it again will pass on an opportunity to increase its benchmark interest rate, although officials have said they are still considering rate increases later in the year.
Ms. Brainard has become the leading voice among Fed officials for a concern widely shared among left-leaning economists: that the central bank will raise rates too quickly, potentially stifling economic growth. It is a role that has raised her profile in Democratic circles, and driven speculation that she is in line for a top job if Hillary Clinton wins the White House.
Dr Brainard contributed the maximum amount allowed by law to Hillary Clinton’s campaign, something which certainly calls into question her political impartiality as a member of the Board of Governors.3
Ms. Brainard’s case for caution combines the idea that the domestic economy is not ready for higher rates, with something new and controversial: that the Fed should care about other countries.
The American economy, until recently, seemed impervious to all but the largest global shocks. But the integration of financial markets has increased the importance of events elsewhere. The rest of the world plays a growing role in determining American mortgage rates.
“The world has just changed fundamentally,” Ms. Brainard said at a New York conference in February. “What China does matters to the U.S.”
In placing greater weight on the global economy, Ms. Brainard has argued that the Fed needs to consider the impact of its decisions on other countries. She said at the February conference the Fed might achieve better results by coordinating with other central banks.
I find this wholly inappropriate. The Times reported the speculation that Dr Brainard might be in line for a top economic position had Mrs Clinton won the election, which is bad enough, but it now appears that she is reversing her previous views “that low rates are important for domestic economic growth and for global stability,” seemingly due to the fact that Donald Trump, and not Mrs Clinton, is now the President. That she is concerned with the impact of Fed decisions on other countries, rather than what is best for the United States, is also inappropriate.
The apparent flatness of the Phillips curve together with evidence that inflation expectations may have softened on the downside and the persistent undershooting of inflation relative to our target should be important considerations in our policy deliberations. In particular, to the extent that the effect on inflation of further gradual tightening in labor market conditions is likely to be moderate and gradual, the case to tighten policy preemptively is less compelling. …
From a risk-management perspective, therefore, the asymmetry in the conventional policy toolkit would lead me to expect policy to be tilted somewhat in favor of guarding against downside risks relative to preemptively raising rates to guard against upside risks. …
This asymmetry in risk management in today’s new normal counsels prudence in the removal of policy accommodation. I believe this approach has served us well in recent months, helping to support continued gains in employment and progress on inflation. I look forward to assessing the evolution of the data in the months ahead for signs of further progress toward our goals, bearing in mind these considerations.
Everything I can find concerning Governor Brainard indicates her preferences for lower rather than higher interest rates, and a caution toward raising rates or taking Fed action which would restrict economic opportunity, yet now, with Mr Trump in the White House, it seems that her views have reversed. It should not be the job of the Federal Reserve to fight the elected political leadership of our country!
Alas! The Governors are appointed for fourteen year terms, and every member of the Board of Governors has a confirmed term which lasts longer than that of President Trump! More, despite Governor’s terms lasting fourteen years, every current member of the Board was appointed by President Obama; there isn’t a single Bush Administration holdover. The staggered terms are meant to prevent that type of situation, but that’s what we have, five members, a solid majority even once President Trump fills the two vacancies, who were appointed by the previous President, all of whom have terms as Governors which will carry them through the entirety of the President’s first term.
If the Board weren’t acting politically, this shouldn’t be a concern. However, the Board are already signaling that they will oppose President Trump’s policies, and that is political. Just because I may wind up opposing some of the President’s economic policies does not mean I find it proper that the supposedly impartial Federal Reserve should fight them.
- Full disclosure: I have IRA accounts with PNC Financial Services, and use PNC as my regular bank. ↩
- I’ve said it before: I do not believe that ‘stimulus’ has any positive reward anymore, because we have not been following the economic models for stimulus. The Keynesian argument that governments need to run deficits during poor economic times has seemed particularly blunted to me, because the second part of John Maynard Keynes’ point, that governments need to balance their budgets and pay down their debts during good times, simply hasn’t been part of the plan. Our continual deficit spending, during good times as well as bad, has taken us completely away from Keynesian ideas and has, in effect, inoculated our economy to any projected benefits from stimulus. Constant stimulus has already been figured in to our economy. ↩
- Dr Brainard was an Obama Administration political appointee as Under Secretary of the Treasury for International Affairs prior to being nominated for the Fed. Dr Yellen served as Chairman of the Council of Economic Advisers for President Clinton, another political job for a Democrat President. ↩