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Fed Right, Trump Wrong
Just-published minutes from the Fed’s July 28-29 meeting indicate that most officials saw conditions for a rate liftoff as “not yet” achieved. They may be approaching a rate-hike moment, but they’re not there yet.
Good call. That’s right: Good call.
As I noted in my most-recent column, important forward-looking, inflation-sensitive market indicators are actually heading down, not up. These include soft commodities, sinking oil, weak gold, a strong dollar, declining Treasury break-even inflation spreads, and a flattening yield curve. Add to that slow nominal GDP, a sluggish money supply, and falling velocity.
Today’s CPI report for July shows virtual price stability, with a 0.2 percent year-on-year gain. And so the Fed is correct in stressing that inflation is not moving up to its 2 percent target. That’s the message of markets and actual inflation indexes.
Now, I don’t want 2 percent inflation; I want price-level stability. But the Fed at least is correct in pointing out that there are no upward inflation pressures that might call for a policy tightening. Add to that weak economic conditions in China, Europe, and the rest of the world, and of course a mediocre U.S. recovery.
So I repeat my point of a week ago regarding Fed rate hikes: Be careful what you wish for. Smarter minds than mine, like bond guru Jeffrey Gundlach and former Fed governor Larry Lindsey, have echoed my sentiment in recent days.
The fed funds futures market is now showing a 45 percent probability of a target rate hike in September. We will see. Unless inflation-sensitive market-price-rule indicators pop up, I don’t see any compelling reason for the central bank to move.
And here’s another point: The stock market, which is a leading indicator of the future economy, is in a wee bit of a correction. Given the recent rise of presidential candidate Donald Trump, we should all be thankful that stocks haven’t plunged. Trump’s agenda of trade protectionism, dollar devaluation, and immigrant deportation is completely anti-growth. It’s like Fortress America in an economy that is completely globalized and where the U.S. must compete in the worldwide race for capital and labor. Trump’s policies don’t fit.
Instead of attempting to wall off America, we should be increasing trade, maintaining a sound and strong dollar, and building a new legal immigration system — one that will bring the best, the brightest, and the hardest-working people to America — rather than seeking mass deportation.
Last of all, and maybe most important, the best thing Trump or any of the GOP candidates can do to grow America’s economy by 4 percent or better is to either slash or abolish altogether the uncompetitive, anti-investment U.S. corporate tax rate. And then the Fed could move toward normalizing its interest-rate and money-supply policies.
But right now that’s not happening. So my message to the Fed remains the same: Move at the pace of an injured snail.
Published in Economics
There inflation in all government activities and it is replacing the real economy which is not healthy, so weak demand, weak investment, weak commodity prices are relative adjustment to an expanding government and it’s dead hand. The Fed is monetizing the debt and funding this monstrosity. Interest rates are flat because credit is not expanding resulting from low expectations and crushing government regulations. The Fed is not capable of fine tuning interest rates to guide the economy any more than government planners can plan, Keynesian spenders can spend constructively. There is one thing we can do that helps, educate our human capital and get out of the way of the other kind.
The Fed is not going to do anything till after the election. They can’t take a chance on spoiling Obama’s wonderful economy. If a GOP is elected they will raise it quickly after the new president is in office so the Republicans get the blame for the pain and they can get their Democrat buddies back in power. If HRC wins they might raise it but it will be slowly if at all to make her look good unless something forces their hand.
Larry, how comfortable are you that these inflation indicators are accurate? I’ve seen articles which highlight that some government-calculated inflation indicators don’t include certain commodities whose prices have been increasing. Regret that I cannot find a link to one of those articles now.
Trump’s proposal may (maybe) stave off deflation which seems to be a real danger now. Fewer low-wage workers (illegals) and fewer cheap products imported from China would reignite some inflation. Of course there would be other unexpected consequences.
Globalization has done wonders for China but it is debatable whether it has been a great thing for America outside of Wall Street and big corporations. Sure it has provided us with cheaper goods but it has also made us dependent on countries with questionable regimes and has eroded the country’s position in the world.
In ZIRPistan, the time is never right.
Weak European markets and China situation mean Feds won’t move
Hey Larry, you running for something?
Larry, do you consider demanding parity on tariffs with Japan and China as trade protectionism? Do you favor continuing to ignore
immigration laws allowing illegal immigrants, mostly uneducated and unskilled, to provide the cheap labor to maintain our economy? Is the economy the only barometer of what is good for the country, ignoring crime, education and medical costs incumbent with illegal immigration? Personally I think not.
–Melissa O’Sullivan Weak European markets and China situation mean Feds won’t move
I just can’t help but think you probably have your own Bloomberg terminal ..