There's been an interesting development these last few weeks. The Fed has threatened to start normalizing monetary policy, hinting that they might raise short-term rates by 25 basis points (1/4 of 1%). Some normalization!
But normalizing monetary policy in our abnormal "new normal" scares the bejesus out of lots of people who have benefited from the current arrangement, or those who believe Fed policy has provided substantial benefits to the broader U.S. economy (i.e., the official jobless rate). Among the latter, a contradiction arises because these people are now forced to argue that the U.S. economy actually sucks, meaning that if the Fed "tightens" now, our lousy economy will be put at further risk. But if Fed policy has actually substantially benefited the broader economy, why does the U.S. economy still suck?
I assume you see the contradiction, although with so many humans being so utterly incompetent to understand anything about themselves or others, I should not assume anything.
Before I quote Larry Summers, who has lately been the most vocal of those urging the Fed to hold fast, let's make sure we all understand the bottom line.
The U.S. economy has sucked since 2008 and will continue to suck if the Fed does nothing.
If the Fed boosts short-term rates by an insignificant percentage, the U.S. economy may suck more than it already sucks.
That's what this rate hike debate is all about. Summers explains why the U.S. economy may suck more if the Fed boosts rates.
Federal Reserve officials have held out the prospect that at long last they may raise interest rates at their September meeting, with the hike taking effect by year’s end barring major unforeseen developments. A reasonable assessment of current conditions suggests that raising rates in the near future would be a serious error that would threaten all three of the Fed’s major objectives: price stability, full employment and financial stability.
Remember, we're talking about a rate hike of 25 basis points which wouldn't take effect until the end of the year.
The Fed, like most central banks, has operationalized price stability in terms of a 2 percent inflation target. The dominant risk of missing this target is to the downside — a risk that would be exacerbated by tightening policy. At present, more than half the components of the consumer price index (CPI) have declined over the past six months for the first time in more than a decade.
Core CPI (excluding volatile food, energy and difficult-to-measure housing) is rising at less than 1 percent, and the most recent comprehensive measure of inflation costs rose at an annual rate of 0.7 percent over the past quarter. Critically, market-based measures of inflation expectations over the next decade suggest that it will be well under 2 percent. If, as now seems likely, the currencies of China and other emerging markets further depreciate, downward pressure on U.S. inflation rates will increase.
In short, here comes that dreaded deflation.
There can be no question that tightening policy will adversely affect levels of employment as higher interest rates make holding onto cash more attractive relative to investing. Higher interest rates also will increase the value of the dollar, making U.S. producers less competitive and pressuring the economies of our trading partners. This is especially troubling at a time of rising inequality. Studies of periods of tight labor markets such as the 1960s and the late 1990s make clear that the best social program for disadvantaged workers is an economy where employers are struggling to fill vacancies.
Here Summers is arguing (correctly) that a tight labor market is best for workers. But of course we don't have a tight labor market, we have a loose labor market ("loose", the opposite of "tight"). So I guess all that Fed monetary policy didn't tighten up the U.S. labor market much, did it?
I mean, if the economy could deteriorate further as Summers warns as a result of a Fed rate hike of 25 basis points, then what kind of economy do we have here in the United States?
See what I mean? This puts a whole new perspective on all this happy "recovery" talk we've had to endure these last seven long years. Larry is digging himself into a deep hole here with regard to the utter failure of Fed monetary policy to help the broader U.S. economy.
And so what does he do? He keeps digging!
In the face of these considerations, why do so many inside and outside the Fed believe that a rate increase is necessary? I doubt that if rates were now 4 percent there would be any great pressure to increase them given current economic conditions. The pressure to increase them comes from a sense that the economy has normalized during the 6 years of recovery and so the extraordinary stimulus represented by 0 percent interest rates should be withdrawn. This has been a consistent theme for the Fed, with much talk of “headwinds” that require low interest rates now but will abate in the not too distant future, allowing for normal growth and normal interest rates.
Whatever merit the theory of temporary headwinds had a few years ago, it is much less plausible as we approach the seventh anniversary of the collapse of Lehman Brothers...
Right, all these "temporary headwinds" are neither temporary nor are they merely headwinds.
It is no longer easy to think of plausible temporary headwinds. Fiscal drag is over. Banks are well capitalized. Corporations are flush with cash. Household balance sheets are substantially repaired.
These phrases are synonyms for the word sucks, as used in the sentence "the U.S. economy sucks."
Now Larry talks about "the new reality," the very same reality some of us got tired of talking about for the last seven years. (We got tired of talking about it because nobody was listening.)
Headwinds are not temporary but rather the new reality. For a variety of reasons rooted in technological and demographic developments and reinforced by greater regulation of the financial sector, the global economy has more difficulty generating demand for all that can be produced.
Satisfactory growth, if it can be achieved, requires very low interest rates that historically we have seen only during economic crises. This is why long-term bond markets are telling us that real interest rates are expected to be close to zero in the industrialized world over the next decade.
New conditions require new policies. There is much that should be done, like major steps to promote both public and private investment, to raise the level of real interest rates consistent with full employment. But until and unless these new policies are implemented, inflation sharply accelerates or euphoria in markets breaks out, there is no case for the Fed to adjust policy interest rates.
Satisfactory growth, if it can be achieved, requires low interest rates in perpetuity, or something like that. And not just "low" interest rates, but zero interest rates if we follow Larry's logic to its natural conclusion.
Those "new policies" that might save us would have to come from the Congress, but Republicans and Democrats can't agree on the time of day, a situation which only gets worse as we suffer through another 2-year presidential election cycle. And all those politicians don't work for us anyway, they work for the elites who finance their election to Congress. No help there.
I'll end on a positive note in so far as (in the words of a commenter on this blog) we only have two more years of reliable electricity and an enormous human die-off is going to start any day now.
Here's my positive note. It certainly gives me a warm & fuzzy feeling to know that, finally, Larry Summers, Ben Bernanke and I agree about something. And what do we agree about?
We all agree that the U.S. economy sucks.
So please, please, please Miss Janet, don't hike dose rates!
From the Bureau of Labor Statistics web site:
People are considered employed if they did any work at all for pay or profit during the survey reference week…
Garrett is 16 years old, and he has no job from which he receives any pay or profit. However, Garrett does help with the regular chores around his parents’ farm and spends about 20 hours each week doing so.
Lisa spends most of her time taking care of her home and children, but she helps in her husband’s computer software business all day Friday and Saturday.
Both Garrett and Lisa are considered employed. They fall into a group called unpaid family workers, which includes any person who worked without pay for 15 hours or more per week in a business or farm operated by a family member with whom they live. Unpaid family workers comprise a small proportion of total employment. Most of the employed are either wage and salary workers (paid employees) or self-employed (working in their own business, profession, or farm)....