The Fed is increasingly concerned about "above-trend" growth. In the mid-1990s, Greenspan grappled with it, too, and wisely held off on raising rates. That's the right move again today.
This Article from The Atlantic I thought was interesting to read from a few days ago. America truly doesn't need a recession as we've come this far from inflation off its peak in July of last year. A fed induced recession would be tough and yes especially for women and just as important people of color. Hopefully Powell sticks to his word and doesn't hike in Nov and Dec.https://www.theatlantic.com/ideas/archive/2023/10/america-recession-disinflation-fed/675700/
Another reason for the Fed to hold is to watch for (further?) signs that high rates are having an effect. While people tend to focus on the housing sector — an important transmission channel — and don’t see much distress for a whole assortment of reasons, there are other places to look that urge some caution. Examples for consumers include auto loan and credit card delinquency rates, and I’ll bet lower rated corporates are also having trouble. All corporates and commercial real estate borrowers who must refinance are facing high costs. Lastly, while SVB was an egregious example of a bank doing a really bad job of managing their asset/liability mismatch and their designation of assets held for sale vs assets held for investment, they will not be alone.
I've always wondered why certain obvious economic policies are not addressed by our political system. For example as you point out having child care handled by the State rather than being the total responsibility of individual female workers who must leave the workforce to engage in child care is an obvious plus for productivity. Yet our political system will not do this. Why? It makes sense to do so in terms of productivity and it enhances family life and household income. Why doesn't capitalism see the advantage in having an efficiently run childcare system? Why do women put up with it?
Great assessment Claudia. Thanks. We should shit-can current macro economic models and develop new ones using small cross functional teams of geopolitical strategists, macro economists, geographers, philosophers, and a mix of educators from contemporary disciplines. The federal government would then empower these teams to create holistic models that produce strategic guidelines to improve sustainable societal outcomes. MMT offers the foundation to make this possible. We destroy so many useful resources now with current actions, it’s beyond time to take iterative alternatives to develop actionable national political strategies.
"When growth is above trend, it’s a sign of unsustainably strong demand."
No. It could be further/better adjustments in relative prices, relaxing of the kinks generated (by the kinks generated) by the Covid/post Covid recovery, Putin/Saudi oil shock, supply chain problems.
The serious difference between the 1990s and today, is that Clinton had a budget surplus which means that the private sector had a deficit. A deficit that was filled in with private bank credit. Today, household debt is low, and budget deficits are adding money to private bank accounts.
How can hiring be "great" when dominant industries of Southern California (show business, where the WGA and SAG-AFTRA have been on lengthy strikes) and Northern California (software tech, which is undergoing a contraction after Silicon Valley Bank collapsed late 2022, and venture capital can't borrow as cheaply following the first string of consecutive interest rate increases in over a decade) have been in chilled hiring phases? How is hiring across this variegated number reduced by so many economists to one word either "bad" or "good"? Honestly puzzled. Any information appreciated.
We are in age of challenges of global warming (ecological priorities), realignment of world economy (geopolitics, slow demise of globalization etc) and newly recognized priorities of social development. A national economic policy should be identifying set of priorities & working the way through with them - energy modernization, new infrastructure & better supply chains to tackle with climate disruptions, building sustainable cities, nurturing strategically important sectors (industrial policy - Chips, Biotech, AI etc) and reorganizing human resources and labor force to keep pace with economic transformation (lifting the student debt burden, higher minimum wages, better social security, building better society etc).
Whatever the growth rate is, it's a post facto of our policy choices. Policy makers (both elected and unelected) should abandon their narrow linear thinking on obsession of trends of growth and simplistic narratives on inflation, monetary policy, employment and zero sum tradeoffs (employment, growth and inflation on balancing scales). The challenges faced by present world are vastly different from the past. People are still trapped in anachronistic thinking & past follies - fearing repeat of wage price spirals of 70s and Philips curve constraints, treating inflation with planned unemployment, sanctity of laissez-faire etc.
On a side note: Why doesn't anyone talk or write about the Fed's balance sheet? It's being drained by almost $70 billion a month. This is having a huge impact on bank reserves and liquidity. Credit is being rationed at a much higher cost. Your thoughts in the balance sheet will be much appreciated!
Thanks Claudia! To Peter Paul Santa Ana's point, my university (which I believe is Claudia's as well - Denison) created a new major after I graduated called PPE (politics, philosophy and economics) to bridge the gaps. Today I would add psychology to the mix as well. Seeing monetary policy through Taylor's Rule is far too simplistic. For example, inflation in the Northeast is half of that in the Southeast. The cost of credit is beyond what most people today have ever seen. Bankruptcies are approaching April 2020 levels. I've often joked that Powell needs to listen to the other Taylor: You Need to Calm Down.
Dr Sahm, can you put forward best & worst case scenarios of failure to understand economic growth trends? If growth is higher than some pre-assumed trend and is allowed to do so ( with Fed rates laxity, more good fiscal etc). What's the downside in that? Unsustainable business cycle? Minsky moment? Higher risks of recession down the road? High inflation down the road?
The myriad of tools available with the Fed today, armed with better economic understanding & if backed by hawk eyes on financial stability (no repeat of SVB oversight debacle) , i think Fed should let the economy takes its course. Policy makers should continue on fiscal (addressing the present challenges as mentioned above) and economy should be nudged for proper transformations. I don't see any real risks in not adhering to trends.
Jay Powell's Greenspan moment
This Article from The Atlantic I thought was interesting to read from a few days ago. America truly doesn't need a recession as we've come this far from inflation off its peak in July of last year. A fed induced recession would be tough and yes especially for women and just as important people of color. Hopefully Powell sticks to his word and doesn't hike in Nov and Dec.https://www.theatlantic.com/ideas/archive/2023/10/america-recession-disinflation-fed/675700/
Another reason for the Fed to hold is to watch for (further?) signs that high rates are having an effect. While people tend to focus on the housing sector — an important transmission channel — and don’t see much distress for a whole assortment of reasons, there are other places to look that urge some caution. Examples for consumers include auto loan and credit card delinquency rates, and I’ll bet lower rated corporates are also having trouble. All corporates and commercial real estate borrowers who must refinance are facing high costs. Lastly, while SVB was an egregious example of a bank doing a really bad job of managing their asset/liability mismatch and their designation of assets held for sale vs assets held for investment, they will not be alone.
I've always wondered why certain obvious economic policies are not addressed by our political system. For example as you point out having child care handled by the State rather than being the total responsibility of individual female workers who must leave the workforce to engage in child care is an obvious plus for productivity. Yet our political system will not do this. Why? It makes sense to do so in terms of productivity and it enhances family life and household income. Why doesn't capitalism see the advantage in having an efficiently run childcare system? Why do women put up with it?
Great assessment Claudia. Thanks. We should shit-can current macro economic models and develop new ones using small cross functional teams of geopolitical strategists, macro economists, geographers, philosophers, and a mix of educators from contemporary disciplines. The federal government would then empower these teams to create holistic models that produce strategic guidelines to improve sustainable societal outcomes. MMT offers the foundation to make this possible. We destroy so many useful resources now with current actions, it’s beyond time to take iterative alternatives to develop actionable national political strategies.
"When growth is above trend, it’s a sign of unsustainably strong demand."
No. It could be further/better adjustments in relative prices, relaxing of the kinks generated (by the kinks generated) by the Covid/post Covid recovery, Putin/Saudi oil shock, supply chain problems.
The serious difference between the 1990s and today, is that Clinton had a budget surplus which means that the private sector had a deficit. A deficit that was filled in with private bank credit. Today, household debt is low, and budget deficits are adding money to private bank accounts.
How can hiring be "great" when dominant industries of Southern California (show business, where the WGA and SAG-AFTRA have been on lengthy strikes) and Northern California (software tech, which is undergoing a contraction after Silicon Valley Bank collapsed late 2022, and venture capital can't borrow as cheaply following the first string of consecutive interest rate increases in over a decade) have been in chilled hiring phases? How is hiring across this variegated number reduced by so many economists to one word either "bad" or "good"? Honestly puzzled. Any information appreciated.
We are in age of challenges of global warming (ecological priorities), realignment of world economy (geopolitics, slow demise of globalization etc) and newly recognized priorities of social development. A national economic policy should be identifying set of priorities & working the way through with them - energy modernization, new infrastructure & better supply chains to tackle with climate disruptions, building sustainable cities, nurturing strategically important sectors (industrial policy - Chips, Biotech, AI etc) and reorganizing human resources and labor force to keep pace with economic transformation (lifting the student debt burden, higher minimum wages, better social security, building better society etc).
Whatever the growth rate is, it's a post facto of our policy choices. Policy makers (both elected and unelected) should abandon their narrow linear thinking on obsession of trends of growth and simplistic narratives on inflation, monetary policy, employment and zero sum tradeoffs (employment, growth and inflation on balancing scales). The challenges faced by present world are vastly different from the past. People are still trapped in anachronistic thinking & past follies - fearing repeat of wage price spirals of 70s and Philips curve constraints, treating inflation with planned unemployment, sanctity of laissez-faire etc.
Econ needs to evolve in 21st century.
On a side note: Why doesn't anyone talk or write about the Fed's balance sheet? It's being drained by almost $70 billion a month. This is having a huge impact on bank reserves and liquidity. Credit is being rationed at a much higher cost. Your thoughts in the balance sheet will be much appreciated!
Thanks Claudia! To Peter Paul Santa Ana's point, my university (which I believe is Claudia's as well - Denison) created a new major after I graduated called PPE (politics, philosophy and economics) to bridge the gaps. Today I would add psychology to the mix as well. Seeing monetary policy through Taylor's Rule is far too simplistic. For example, inflation in the Northeast is half of that in the Southeast. The cost of credit is beyond what most people today have ever seen. Bankruptcies are approaching April 2020 levels. I've often joked that Powell needs to listen to the other Taylor: You Need to Calm Down.
Dr Sahm, can you put forward best & worst case scenarios of failure to understand economic growth trends? If growth is higher than some pre-assumed trend and is allowed to do so ( with Fed rates laxity, more good fiscal etc). What's the downside in that? Unsustainable business cycle? Minsky moment? Higher risks of recession down the road? High inflation down the road?
The myriad of tools available with the Fed today, armed with better economic understanding & if backed by hawk eyes on financial stability (no repeat of SVB oversight debacle) , i think Fed should let the economy takes its course. Policy makers should continue on fiscal (addressing the present challenges as mentioned above) and economy should be nudged for proper transformations. I don't see any real risks in not adhering to trends.