Sustainable Growth and Monetary Policy
Jack Guynn
frbatlanta.org
snips and commentary follow:
So far this year, early indications are that business investment spending will be stronger and may account for a larger proportion of overall growth. Renewed business investment is vital because it plants the seeds for future growth in productivity, output and employment. The key to robust investment spending lies in corporate profits, which are the major source of funding for investment.
Looking for job growth
While businesses now have become aggressive again when it comes to upgrading equipment, they remain cautious when it comes to human capital. By far the biggest disappointment in our still unfolding economic recovery remains job growth. Historically, employment growth has lagged an upturn in the economy coming out of a recession, and we clearly saw that trend after the previous recession in 1990–91. But this time the lag is turning out to be even longer. The payroll numbers finally turned positive in September 2003 and have held that positive tone marginally through February. During the past six months, the U.S. economy managed to add a total of 364,000 jobs, averaging about 61,000 new payroll jobs per month.
[WTF is he smoking? we added jobs only in a hedonic sense - mish]
But I think it’s important to acknowledge that part of the reason for the relatively low unemployment rate is the recent decline in the rate of participation in the labor market, which was on an upward trend in the 1990s. Indeed, labor force participation in February of this year was at its lowest level since 1988. People have left the labor market for various reasons, such as continuing education or retraining. And there’s an increasing percentage of people who have become discouraged about near-term job prospects.
As we try to understand today’s murky employment picture, I think it’s helpful to think about how productivity continues to reshape our labor markets. Simply put, if output per worker hour is increasing faster than final demand there is less pressure to add to the workforce.
[You have to be brain dead to not understand the job picture - mish]
But I think it’s important to acknowledge that part of the reason for the relatively low unemployment rate is the recent decline in the rate of participation in the labor market, which was on an upward trend in the 1990s. Indeed, labor force participation in February of this year was at its lowest level since 1988. People have left the labor market for various reasons, such as continuing education or retraining. And there’s an increasing percentage of people who have become discouraged about near-term job prospects.
I think that ongoing gains in labor productivity could act to constrain the overall pace of new hiring for a little while longer — but not indefinitely.
[Of course he is assuming that demand picks up AND those jobs will be here vs China or India - mish]
One of the main reasons I’m optimistic about the outlook for the economy is low inflation. Low inflation ushered in the era of high productivity growth in the 1990s that I mentioned earlier, and it continues to drive innovation in subtle ways. For example, low inflation allows firms to focus on long-run projects, raising real returns because investments are allowed ample time to bear fruit. One of the Fed’s goals with regard to inflation is to remove it as a factor in the economy so that you don’t have to think about it or adjust your plans because of large and unexpected changes in inflation or interest rates.
In large part, the Fed was able to ease policy decisively because of low inflation. For the past two years, core inflation has declined consistently to where it now hovers just above 1 percent, at the lowest rate since the 1960s. In contrast to the erratic and troublesome inflationary period of the 1970s, our economy now has a track record of low and stable inflation. And the general expectation is that low inflation will continue because the Fed is perceived to be committed to a long-term policy of price stability.
I expect the Fed’s accommodative policy, and the low interest rates it has helped to engender, is popular with many in this room. Following last week’s FOMC meeting, our statement again concluded by saying, “the Committee believes it can be patient in removing its policy accommodation.” Yet as rates remain low and I think about the future path of policy, I remind myself it is also important to watch for unintended consequences of keeping monetary policy too accommodative for too long. Indeed, some of my contacts in various industries have stressed to me that at some point it will be appropriate, and helpful, to allow interest rates to return to more normal levels so that markets can sort themselves out in an orderly way and return to balance.
Given disappointing employment growth, slack resource use and muted increases in core consumer prices, the Fed has good reason to maintain its accommodative policy, at least for now. But if my forecast for more robust economic growth materializes, then, at some point, a fed funds rate of 1 percent will no longer be the best policy.
[Robust economic growth required for a rate hike - Anyone here think that is about to happen? with jobs? - mish]
It is indeed a luxury to have an inflation environment in which policymakers can be patient in ensuring the economy has gained a solid footing. That said, luxury comes with a price tag, and patience is not unlimited. The old truism that “there’s no such thing as a free lunch” applies today, as always.
The same advice I offered earlier to the students here — to stay flexible and forward looking — I think applies to all of us, as individuals, business leaders and policymakers. While we should keep one eye on today’s issues and challenges, we should also look ahead for the path that leads to the best outcome over the longer term.
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All in all this is a bit more hawkish that I expected from earlier 1 line snips that I saw. However it is all based on two presumptions that I do not buy
1) A ROBUST economy
2) Creation of Jobs
Given that I expect very WEAK growth AT BEST, and more than likely a recession in 2005, the prospects of hikes seem minimal.
Treasuries gave up their early gains and remain flat on this news. With portions of durable goods falling unexpectedly lower, it is hard to see why anyone would think a "robust" recovery is coming.
Mish |
