Federal Reserve Chairman Jerome Powell has decided to listen more to markets and to become agnostic about economics.
Through December, the stock market indexes
had fallen a record seven times in a row following Fed policy committee meetings and, in a stunning vote of no confidence, dramatically after the chairman spoke in December.
Powell has backed off. He won’t be raising the federal funds rate again any time soon and has promised to be more cautious about liquidating the Fed’s holdings of the mortgage-backed securities and Treasuries.
Pundits have concluded that the Fed has gone from trying to wean markets from cheap credit to promiscuity, giving the equity investors exactly what they want.
Nothing could be further from the truth — money isn’t artificially cheap anymore.
Over the last decade, credit markets have changed profoundly. More supply — sluggish growth and endemic structural woes in Europe, China and Japan have increased the dollar’s
role in global commerce. Consequently foreign investors and central banks are holding more Treasuries and other dollar-denominated securities and bank deposits.
These combine to significantly lower the neutral rate of interest. At 2.4% for the federal funds rate and 4.4% to 4.7% for mortgages, the Fed has found the sweet spot for hitting its 2% inflation target and maintaining a solid pace of economic growth. For example, as mortgages inched up to 4.9% in November, new home sales tanked but as rates slipped back in December, buyers returned to the market.
All of this flies in the face of what Fed economists crank from their models. At 4% unemployment the recent rapid pace of hiring should be pushing wages off the charts. For the last decade, economists harped that productivity growth is dead — all the good stuff has been invented.
In January, the economy created 304,000 jobs and wages were up 3.2% from a year ago but inflation remains remarkably subdued. Employers are finding ways to attract folks who quit looking for work during the Obama years back into the labor market and investing heavily in training to assist the handicapped hold satisfying positions and the unskilled find career paths.
Economists must be playing a lot of games and betting on sports with their hand-held devices and laptops while the rest of humanity is using those to benefit from artificial intelligence. The latest data indicates productivity is clipping along at the 1.2% rate necessary to accommodate wage increases of 3.2% and inflation at or below 2%.
So many things are working to keep prices from flying out of control. For example, the excess profits consumer products companies reap from mixing 25 cents worth of ammonia and lemon scent to sell window cleaner at $3.29 is under assault by Amazon and discount chains offering own-label products at fairer prices.
In China, the Communist Party is panicking to do most anything to keep the factories rolling—including never repay loans for its increasingly dominant state-owned enterprises. That pushes down prices everywhere. More broadly, excess capacity abounds for manufacturing worldwide.
Oil and gas prices and the cost of just about everything else that uses that stuff have been pushed down by the shale boom in West Texas, where drilling is getting ever more efficient.
Overall, Powell acknowledges the recovery has had uneven consequences for labor markets around the country—in most places the recovery is robust but not in many long-depressed counties. And the bond investors are moving to the view he’s done raising rates.
Economists’ models forecast the future by churning data—mostly domestic information—from the past several decades, and simply don’t capture those sorts of structural changes.
Powell can’t very well say economics is bunk—but I can. And though he can’t fire those jug heads, he doesn’t have to listen to them.
Good for him and good riddance to the Dismal Science.