Gabriela -
The fact that I am willing to entertain an opposing viewpoint does not imply an unqualified endorsement. I try not to judge an argument based on the conclusion which I believe should be reached, but rather on the quality of the argument and on the quality of the information on which it is based.
In this respect I hope you do not have a problem with Yardeni, because what he has provided us is a reality check on what is. I will assume that this is not the case and move on directly to what I believe is the real source of your contention with Yardeni, namely, that you have opposing points of view re the pace of the US economy and the correct interest rate adjustments to be applied.
Yardeni has not projected gloom and doom for the world economy. What he has suggessted is a slower pace of economic growth and a slower pace of earnings growth. Yardeni acknowledges tight labor markets in the US and a further decline in unemployment. Opposing this, he names a number of offsetting factors, and I will briefly examine some of them (I will paraphrase his arguments);
1. As Asia cleans up its banking mess, the supply of cheap credit from this region will evaporate. None of us are unaware of the enormous influence that a steady supply of cheap yen has had on world capital markets, particularly in Asia.
2. Weak demand growth from Asia will cause oil prices to remain weak, and perhaps to decline further. This is being borne out. Since agriculture is particularly petroleum intensive, what we have been seeing is that the growth of these two factors, oil and food, have actually been declining faster than the core rate of CPI.
3. Asian economic weakness foreshadows declining prices for industrial materials, including metals. I can't argue too much with this one. Silver is a special situation of relatively minor importance in the world economy. What we are talking about here is copper, lead, steel, rubber, fabric, tallow, etc.
4. The impact on US exports will be minimal, but to some degree we will import deflation from Asia. This is most dramatically illustrated by an actual year over year decline of more than 7% in the cost of importing capital goods.
5. Slack in US capacity and serious overcapacity abroad. China currently uses only about 40% of its industrial capacity, and we have all read about the excessive buildup in capacity elsewhere in Asia, and the resultant bankruptcies and layoffs in Korea, Thailand, Indonesia, etc. Yardeni cites govt statistics showing recent declines in capacity utilization in the US.
I would add to these arguments the fact that real interest rates are historically at the high end of the spectrum and have been for some time. On balance, Yardeni concludes that these factors leave the Fed room to ease interest rates by about a half point over the coming year.
Whether the Fed will see things that way has yet to be determined. As another link that I also posted demonstrates, most Fed members in early Dec (roughly the same time as Yardeni's comments) maintained a bias towards tightening rates. However, only one member, Broaddus, shared your concern that rates be increased immediately. The prevailing viewpoint may be somewhat summed up in the following paragraphs:
>>In the course of their discussion, many members remarked on the absence of inflationary price pressures during a period when economic activity had risen briskly and labor markets had grown steadily tighter. The muted effect of higher labor compensation on unit labor costs and prices reflected sharp advances in productivity partly associated with the rapid expansion of the stock of capital; the latter had been stimulated, most probably, by the desire to enhance efficiency and thus hold down costs. In addition, the earlier appreciation of the dollar and the unusually damped increases in the cost of health benefits in recent years had helped to limit the rise in compensation.
As members had noted at previous meetings, these favorable influences were likely to erode over time. Anecdotal reports indicated that health insurance premiums were beginning to trend higher, and the dollar would not rise indefinitely. More fundamentally, persistent tightness in labor markets risked a continuing uptrend in labor compensation increases that, at some point, could not be fully offset by productivity gains. Under those circumstances, competitive market conditions would allow firms to raise prices to compensate for increases in their costs. However, for some period ahead, developments associated with the turmoil in Asia along with the partly related appreciation of the dollar would tend to intensify import competition and damp the prices of goods.
In the Committee's discussion of policy for the intermeeting period ahead, nearly all the members favored a proposal to maintain an unchanged policy stance. In their discussion, members emphasized that price inflation had remained subdued, indeed with some key price measures indicating declining inflation, despite the persistence of robust economic growth and high levels of resource use, notably in labor markets. They expressed concern, however, that multiplying indications of faster wage increases might presage rising price inflation at some point. Weighing against the risks of higher inflation was the financial turmoil that had intensified in Southeast Asia during October and more recently in Korea. The effects of those developments on the U.S. economy were quite limited thus far, but the members expected some damping of economic expansion and price increases in the quarters ahead and they did not rule out a potentially strong impact in the event of an even deeper crisis in Asia, or one that spread to other countries. Nonetheless, many members commented that, with domestic demand still quite strong and the economy possibly producing beyond its potential, they viewed the risks on balance as pointing to rising price inflation and the next policy move as likely to be in the direction of some tightening. However, most members agreed that the need for such a policy adjustment did not appear to be imminent, and that prevailing near-term uncertainties warranted a cautious wait-and-see policy posture. One member, while acknowledging the downside risks to the expansion associated with potential developments in Asia, still was persuaded that the economy probably would continue to expand at an unsustainable pace and that monetary policy should be tightened promptly to avert a further buildup of pressures in already strained labor markets, associated increases in labor costs, and at some point an inevitable rise in price inflation.
Other considerations cited by some members in favor of an unchanged policy included the possibility that, because a policy tightening move was not expected at this juncture, even a modest firming action might well have outsized effects in financial markets, especially the foreign exchange markets. Current conditions in domestic financial markets clearly remained supportive of spending, but it also was noted that the real federal funds rate was relatively high and that growth in the broad measures of money was expected to moderate over coming months after a period of robust expansion. The members agreed that the crosscurrents that were generating the present uncertainties in the outlook for economic activity and inflation made a flexible approach to monetary policy particularly desirable at this juncture.<<
In favor of your own outlook, it must be noted that some consideration was given to the possible negative consequences an increase at that time might have produced in the forex markets, but the minutes do not indicate that this was a primary consideration. The one member who dissented was undoubtedly Mr. Broaddus, whose own viewpoints have been amply excerpted on this forum previously by myself:
>>Vote against this action: Mr. Broaddus.
Mr. Broaddus dissented because he continued to believe that a modest tightening of policy would be prudent in light of the apparent persisting strength in aggregate demand for goods and services. He recognized the case for holding policy steady given recent developments in East Asian economies and financial markets; he believed, however, that a slight firming at this meeting would provide valuable insurance against the risk that demand growth might remain above a sustainable trend and require a sharper policy response later. He thought further that the potential benefits of this insurance outweighed the risk that such an action would have a significant negative impact on U.S. economic activity. He also believed that signaling a greater willingness to tolerate modest policy adjustments in response to emerging developments would foster more flexible movements in longer-term financial markets, and specifically enable longer-term interest rates to play their traditional role as automatic stabilizers for the economy more effectively.<<
One might conclude that Mr. Broaddus believes, as you apparently do, that the Asian impact has been given undue consideration by the Fed in determining interest rate policy. Future events will determine if this is so.
It would be helpful if you could post some of Mr. Roach's viewpoints here for us to consider, but I must point out in Yardeni's defense that a quick perusal of some of his comments from earlier this year show him to have been extremely accurate in forecasting the future direction of interest rates, commodities, and the economy in general. Yardeni apparently examined many of the same factors as the Fed, but appears to have given more weighting to the Asian factors and less to US labor markets. In any event, the quality of his arguments render them worthy of consideration. This does not change the fact that I always found it annoying that the Wall Street Journal seemed to think that he was the only economist on Earth worthy of being quoted on a daily basis;o]. |
