(What’s Left of) Our Economy: No, the Fed Isn’t Terribly Worried About a Trade-Mageddon

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agriculture, consumption, Federal Open Market Committee, Federal Reserve, FOMC, inflation, interest rates, investment, Jobs, Mainstream Media, monetary policy, tariffs, Trade, Trump, {What's Left of) Our Economy

OK, let’s get away from John Brennan, and public view of Russia, and get back to something uncontroversial only by comparison – President Trump’s tariff-heavy trade policies. (Don’t worry – I’m sure I’ll get to the Trump-related Michel Cohen and Paul Manafort legal results as soon as I can figure out something distinctive to say about them.)

As known by RealityChek regulars, the national media has been filled with articles reporting that Mr. Trump’s actual and threatened tariffs on aluminum and steel, and on products from China, have already started backfiring on the U.S. economy in any number of ways: leading to job and production cuts in industries that use the two metals as key inputs, and creating major uncertainty throughout the economy among sectors dependent on Chinese products as parts, components, and materials for their goods, and on selling Chinese final products to consumers.

The official U.S. data on economic growth and employment, as I’ve reported, have shown that, so far, exactly the opposite has been true for the metals-using industries. Yesterday afternoon, another important indicator was made public that casts major doubt that the economy is currently experiencing a “trade-mageddon,” or is bound to any day now. I’m referring to the minutes of the July 31-August 1 meeting of the Federal Reserve’s Federal Open Market Committee (FOMC) – the members of the central bank’s board of governors who vote on monetary policy.

Most Mainstream Media newspaper headlines claimed that latest version of these minutes – which contain separate detailed analyses of the nation’s economic and financial situation by the FOMC members and the Fed’s staff of economists alike – contained sobering warnings about the “escalating trade war” posing “a big threat” to the current American recovery. And the members (I’ll focus on their analysis, given that they actually decide on the Fed’s moves) did definitely express trade-related concerns. Here’s how they put it:

“all participants [FOMC members] pointed to ongoing trade disagreements and proposed trade measures as an important source of uncertainty and risks. Participants observed that if a large-scale and prolonged dispute over trade policies developed, there would likely be adverse effects on business sentiment, investment spending, and employment. Moreover, wide-ranging tariff increases would also reduce the purchasing power of U.S. households. Further negative effects in such a scenario could include reductions in productivity and disruptions of supply chains. Other downside risks cited included the possibility of a significant weakening in the housing sector, a sharp increase in oil prices, or a severe slowdown in EMEs [emerging market economies].

But here’s what the members also said:

>Despite the above concern about consumer purchasing power suffering from tariff hikes, “Indicators of longer-term inflation expectations were little changed, on balance.”

>Several members commented that “prices of particular goods, such as those induced by the tariff increases” would likely fuel some “upward pressure on the inflation rate” but that these pressures would be “short-term” and had multiple causes. Further, depressed agricultural prices – due partly to recent trade developments, as noted below – would exert downward pressure on domestic inflation.

>Despite concerns about the impact of trade-induced uncertainty, “incoming data indicated considerable momentum in spending by households and businesses” and that levels of household and business confidence (regarded as key forward looking economic indicators) remained “high.”

>“Business contacts in a few Districts reported that uncertainty regarding trade policy had led to some reductions or delays in their investment spending.” Yet “a number of participants indicated that most businesses concerned about trade disputes had not yet cut back their capital expenditures or hiring….” And the possibility that prolonged trade tensions would change this picture was only described as a possibility.

>Although “Several participants observed that the agricultural sector had been adversely affected by significant declines in crop and livestock prices over the intermeeting period,” some FOMC members observed that this deterioration only “likely” and “partly flowed from trade tensions.”

And perhaps most important, the FOMC members “viewed the recent data [including trade-related information] as indicating that the outlook for the economy was evolving about as they had expected” and that their stated determination to raise the federal funds rate gradually, in order to sustain the expansion but discourage economic overheating, remained fully intact.

As the Fed participants always say, their analyses and policy decisions will be data-dependent. But it’s clear that the real message of these minutes is that the data justify no trade war-related alarmism now, and little for the foreseeable future.

(What’s Left of) Our Economy: Rising Fed Rates Amid Slowing Real Wages?

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Federal Open Market Committee, Federal Reserve, inflation-adjusted wages, interest rates, Labor Department, manufacturing, private sector, recovery, wages, {What's Left of) Our Economy

Although it’s usually hard to muster much sympathy for the governors of the Federal Reserve, today might be an exception.

On the one hand, this afternoon their Open Market Committee is scheduled to announce its latest decision on interest rates, and it’s given many indications that it’s going to again make the cost of borrowing a little more expensive. That probably means, all else equal, that economic activity in the United States (including growth and hiring) will slow down, at least in the short term.

On the other hand, the U.S. government reported a slew of economic data this morning indicating that the economy is getting weaker – which would make at least the timing of even a modest rate hike awkward. Among them were inflation-adjusted wage figures (for May) that once more reveal a significant slowdown in American workers’ real take-home pay.

For the private sector overall (the Labor Department, which calculates these figures, doesn’t report inflation-adjusted wages for public sector workers, because their government-set pay tells us little about the state of the economy), the news wasn’t bad at all on a month-to-month basis. Constant-dollar wages rose 0.28 percent from their April levels – after having gone exactly nowhere the month before.

But the year-on-year results – which smooth out inevitable random-ish monthly fluctuations – were again nothing less than discouraging. From last May until this May, this price-adjusted pay increased by just 0.56 percent. That was indeed their strongest annual improvement since last December’s 0.75 percent. But it was much less than half the after-inflation pay advance between the previous Mays (1.42 percent), much less that of May, 2014-May, 2015 (2.33 percent).

So largely as a result, during the current economic recovery – which is nearly eight years old – real private sector wages are up only 4.26 percent.

But according to the Labor Department, private workers overall have been enjoying salad days compared with manufacturing workers. The latter’s real wages fell on month in May by 0.28 percent. It’s true that this decline followed an upwardly revised 0.55 percent sequential April increase that was the sector’s best since August, 2015’s 0.66 percent. But the May monthly decline was the sector’s worst since last November’s 0.64 percent slide.

Manufacturing’s year-on-year real wage results are scarcely better. In May, they flat-lined — their worst such performance since September, 2014’s 0.29 percent annual dip. The two previous May annual real wage increases”? Between 2015 and 2016, 2.45 percent, and between 2014 and 2015, 1.53 percent.

And during the nearly eight years since the economy began growing once again, real manufacturing wages are up 1.31 percent.

These glum wage data notwithstanding, there still could be good reasons for the Fed to announce another rate hike today. As RealityChek readers know, it’s entirely possible that recent years of stimulus from the central bank has mainly stolen potential growth from the future by promoting artificial growth. Similarly, as the Fed itself has acknowledged lately, monetary policies that have made credit so cheap – and indeed, practically free for blue-chip borrowers – for so long can encourage the kind of crackpot investing and financial instability that could trigger another global crisis.

If the Fed emphasizes these concerns in its (usually brief) statement accompanying the interest rate announcement, or in the more detailed Open Market Committee meeting minutes it publishes later, it will deserve the nation’s gratitude for straight talk – however overdue it might be. If, however, the central bank insists that it’s raising rates mainly because the economy is looking encouraging, it will be increasingly deserve the label of mindless cheerleader.  

(What’s Left of) Our Economy: The Fed’s Dangerous Can-Kick

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China, debt, Federal Open Market Committee, Federal Reserve, Financial Crisis, Great Recession, inflation, interest rates, Janet Yellen, Jobs, leverage, monetary policy, recovery, unemployment, yield, {What's Left of) Our Economy

Reverberations continue from the Federal Reserve’s decision last Thursday to keep the short-term interest rate directly controlled by the central bank at the so-called zero bound – after strong hints most of the spring and well into the summer that the financial crisis-born policy of super easy money would finally start coming to an end. Most of the commentary has focused on the incredibly convoluted rationale for delay presented by Fed Chair Janet Yellen at a press conference held following the “stand pat” announcement. That’s entirely understandable, as I’ll explain below. What worries me even more, though, is how the kinds of financial stability threats that triggered the 2007-08 crisis have apparently dropped off the Fed’s screen completely.

It’s not necessary to believe that the U.S. economy is performing well to be puzzled by the Fed decision – which was nearly unanimous. That’s because the Fed majority itself clearly believes it’s performing well. Here’s how Yellen described the recovery from the Great Recession:

“The recovery from the Great Recession has advanced sufficiently far, and domestic spending appears sufficiently robust, that an argument can be made for a rise in interest rates at this time. We discussed this possibility at our meeting.” A little later, Yellen emphasized, “You know, I want to emphasize domestic developments have been strong.”

The Chair did spotlight areas of continued economic weakness, including sluggish wage growth that was contributing to overall inflation rates remaining well below the levels characteristic of a truly healthy economy; the stubbornly high number of Americans who remained out of the workforce, which takes much of the sheen off of the major reduction seen in the headline unemployment rate; and weakening economies in China and elsewhere abroad, which roiled stock markets in the United States and overseas in August.

But she persisted in describing weak prices as mainly due to “transitory” factors, like the depressed global energy picture and the strong dollar (which makes imported goods bought by Americans cheaper). More important, Yellen repeatedly emphasized points like “I do not want to overplay the implications of these [and other] recent developments, which have not fundamentally altered our outlook. The economy has been performing well, and we expect it to continue to do so.” 

Moreover, and most important, the record makes clear that most of the voting members of the Fed’s leadership – the Open Market Committee – “continue to expect that economic conditions will make it appropriate” to raise interest rates “later this year.” All of which inevitably and justifiably has raised the question of why, if most Fed policymakers remain confident that the U.S. and even world economies will remain on a course encouraging enough to warrant slightly tighter monetary policy by year end (i.e., in three months), all except one decided that the conditions of these economies are too fragile now to withstand rates even the slightest bit higher than their current emergency, mid-crisis levels.

Nor is this question answered adequately by Yellen’s claim that it’s crucial not to raise rates too early because such actions could snuff out the recovery’s momentum. Indeed, the Chair herself stated that she buys one of the most compelling reasons to hike sooner rather than later – because the delay between the approval of a monetary policy decision like a rate hike and the appearance of its effects on the economy means that inflation could overheat if the Fed waits too long to step on the brakes.

As a result of these contradictory messages, it’s hard to avoid the conclusion either that the Fed is genuinely confused about the real state of the economy and how it can strengthen it; or that despite its expressed confidence, it still believes that even the kind of minimal rate hike it’s been telegraphing – which Yellen further has intimated will still leave monetary policy “highly accommodative for quite some time” – could bring the recovery to its knees. No wonder investors are confused, too – and increasingly nervous.

And this is only the set of problems on which the economic and financial chattering classes are concentrating. The problem they’ve overlooked for now is even more disconcerting: The Fed’s latest statements about the future of its super-easy money policies contain no mention of the big reason to be genuinely scared of super-easy money policies: They’ve shown a strong tendency to encourage reckless financial practices that tend to end in oceans of tears.

The reason should be pretty obvious, especially since it played out just a few short years ago and nearly blew up the American and global economies. When money is for all intents and purposes free and in glut conditions, incentives to use it responsibly vanish. After all, by definition, it’s no longer precious: If you lose some in a bad investment, you feel confident that more will be easy to get.

At very best, then, nothing like market forces exist to discipline lending and investing, and thereby increase the odds that credit will be used in productive ways that bring the greatest, most durable benefits to the entire economy and society. In fact, too many investors will view the strongest incentives as those fostering a thirst for yield – which drives them into ever riskier assets simply because safer choices offer so little return. At worst, borrowers take on amounts of debt that become ruinous whenever interest rates do finally rise – and threaten the entire financial system and economy.

The Fed’s reluctance to raise rates may in fact stem in part from fears about that latter scenario. It’s true that the economy is less leveraged these days than it was during the previous bubble decade. But that doesn’t mean there’s not a lot of bad, vulnerable debt out there – including that wracked up by the federal government. Worse, precisely because the longer the Fed waits, the more dubious debt will accumulate, the more painful any rate hikes are bound to be.

What’s genuinely sobering about can-kicking by the Fed is that the central bank is structured to be insulated from politics and its obsession with short-run gratification. If the Fed is so reluctant to bite this bullet, and impose some near-term costs on the economy to place it on a sounder footing, where will America’s adult supervision come from?