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Do-Nothingism, a Fine Idea for the Fed Do-Nothingism, a Fine Idea for the Fed
(3 days later)
Janet Yellen is fond of saying that decisions by the Federal Reserve Board will be “data dependent.” In remarks on Friday at Harvard University she added that the Fed should raise rates “gradually and cautiously” as the economy improves. Janet Yellen is fond of saying that decisions by the Federal Reserve will be “data dependent.” In remarks on Friday at Harvard University she added that the Fed should raise rates “gradually and cautiously” as the economy improves.
If she’s true to her word, Ms. Yellen, the Fed’s chairwoman, will resist what many people think will be an interest rate increase when the Fed’s policy committee meets in mid-June. The underlying economic data — on jobs, prices and economic growth generally — simply do not support such an increase.If she’s true to her word, Ms. Yellen, the Fed’s chairwoman, will resist what many people think will be an interest rate increase when the Fed’s policy committee meets in mid-June. The underlying economic data — on jobs, prices and economic growth generally — simply do not support such an increase.
Widespread expectations of a rate increase arose in part from a misreading by investors of the minutes of a Fed meeting in April. What the minutes actually said was that “it likely would be appropriate” to raise rates in June — if economic growth picked up in the second quarter, if the labor market remained strong and if inflation rose from its depressed levels.Widespread expectations of a rate increase arose in part from a misreading by investors of the minutes of a Fed meeting in April. What the minutes actually said was that “it likely would be appropriate” to raise rates in June — if economic growth picked up in the second quarter, if the labor market remained strong and if inflation rose from its depressed levels.
Those are very big ifs that, by all indications, are not being met.Those are very big ifs that, by all indications, are not being met.
Government data on economic growth in the second quarter will not be out before the Fed’s next meeting, but early signs are grim. In May, service-sector growth in the United States slowed markedly and manufacturing continued a steep decline, according to recent purchasing managers’ surveys by Markit, a data supplier. The surveys, which have been prescient, suggest that growth in the second quarter will be at a meager annual rate of 0.7 percent, on par with growth in the first quarter of 0.8 percent.Government data on economic growth in the second quarter will not be out before the Fed’s next meeting, but early signs are grim. In May, service-sector growth in the United States slowed markedly and manufacturing continued a steep decline, according to recent purchasing managers’ surveys by Markit, a data supplier. The surveys, which have been prescient, suggest that growth in the second quarter will be at a meager annual rate of 0.7 percent, on par with growth in the first quarter of 0.8 percent.
Recent jobs numbers have also been disappointing. Job growth last month, reported shortly after the Fed’s April meeting, was the slowest since September, with only 160,000 new positions added. Job growth in May could be even worse if, as anticipated, the recent slowdown in services and manufacturing impedes hiring. The Markit surveys project a gain in May of only 128,000 jobs.Recent jobs numbers have also been disappointing. Job growth last month, reported shortly after the Fed’s April meeting, was the slowest since September, with only 160,000 new positions added. Job growth in May could be even worse if, as anticipated, the recent slowdown in services and manufacturing impedes hiring. The Markit surveys project a gain in May of only 128,000 jobs.
As for price inflation, it remains below the Fed’s target of 2 percent. What evidence there is of inflation is largely attributable to slowly rising oil prices, not to any significant or fundamental improvement in wages or spending or, by extension, economic health.As for price inflation, it remains below the Fed’s target of 2 percent. What evidence there is of inflation is largely attributable to slowly rising oil prices, not to any significant or fundamental improvement in wages or spending or, by extension, economic health.
Rate increases are called for when economic activity is speeding up to the point of overheating, as reflected in an upward spiral in wages and prices. At its best, the economy in recent years has managed to grow at an annual rate of about 2 percent, a moderate pace that has resulted in considerable slack in the job market. Raising rates in June would apply the brakes to a recovery that has never hit full speed and that now appears to be slowing.Rate increases are called for when economic activity is speeding up to the point of overheating, as reflected in an upward spiral in wages and prices. At its best, the economy in recent years has managed to grow at an annual rate of about 2 percent, a moderate pace that has resulted in considerable slack in the job market. Raising rates in June would apply the brakes to a recovery that has never hit full speed and that now appears to be slowing.
This sad reality must be frustrating for the Fed. When the term of the previous Fed chairman, Ben Bernanke, ended in 2014, it was widely assumed that the Federal Reserve’s next big task was to reverse the near-zero interest rate policy of the bailout years. That assumption has created pressure on the Fed, partly self-imposed, to do just that.This sad reality must be frustrating for the Fed. When the term of the previous Fed chairman, Ben Bernanke, ended in 2014, it was widely assumed that the Federal Reserve’s next big task was to reverse the near-zero interest rate policy of the bailout years. That assumption has created pressure on the Fed, partly self-imposed, to do just that.
Adding to the frustration is that Fed policy is not to blame for the economy’s underperformance. Congress bears much of the blame because of its tightfisted federal budgets when more government spending is needed to offset feeble spending and investment in the private sector. Still, sound policy making by the Fed requires answering to conditions as they are, not as policy makers might wish they were.Adding to the frustration is that Fed policy is not to blame for the economy’s underperformance. Congress bears much of the blame because of its tightfisted federal budgets when more government spending is needed to offset feeble spending and investment in the private sector. Still, sound policy making by the Fed requires answering to conditions as they are, not as policy makers might wish they were.