The basic story of US economic policy right now is all about the Federal Reserve,
which is trying to bring inflation down by raising interest rates, which should
cool off the economy.
اضافة اعلان
The Fed’s actions have, in fact, been successful in
producing a major tightening of financial conditions. For the most part, Fed
policy works through two channels: tight money raises mortgage rates, which
causes a housing slump, and it also leads to a strong dollar, which eventually
makes US goods less competitive on world markets. Both channels have been
working, at least as far as financial markets are concerned.
So far, however, there has not been much evidence of
economic cooling. The most recent inflation report from the Bureau of Labor
Statistics came in hot. The gross domestic product report released recently was
fairly strong, clearly refuting claims that we are in a recession.
So does not this say that the Fed needs to do more?
Do not the numbers speak for themselves?
Well, no. Numbers rarely do.
There is a
cacophony of voices among economists right now, which puts me in mind of a line
from my old teacher Charles Kindleberger, from back in the days when economists
obsessed about the balance of payments. (They no longer do, which is a whole
other story.) He wrote that “the existence of a variety of balance-of-payments
definitions makes it possible for an observer always to be grave, or
optimistic, according to his temperament”. So it is now with Fed policy and the
inflation outlook.
Start by considering GDP. The headline number was
indeed pretty strong — 2.6 percent growth at an annual rate, after two quarters
of decline. But quarter-to-quarter fluctuations in growth are often driven by
volatile items that tell you little about underlying trends. In this case, the
quarter’s growth is more than explained by a drop in the real trade deficit
(which made up for softer results elsewhere), probably reflecting the ripple
effects from supply chain disruptions that have mostly faded away.
Some observers like to focus on “core GDP”, which
excludes net exports, inventory changes and government purchases. Where the
headline number shows an economy that slumped in the first half of this year
and resumed growth in the third quarter, core GDP tells us a tale of an economy
steadily slowing and currently more or less stalled.
Stripping out the effects of the US trade deficit is
helpful as a way to dampen the statistical noise, but looking forward, we
should expect the strong dollar to weigh on exports and become a major drag on
the economy.
Some observers like to focus on “core GDP”, which excludes net exports, inventory changes and government purchases. Where the headline number shows an economy that slumped in the first half of this year and resumed growth in the third quarter, core GDP tells us a tale of an economy steadily slowing and currently more or less stalled
Why have we not seen this yet? Mainly because while
the effects of a strong dollar on trade can be powerful, they take a long time
to materialize. In international macroeconomics, one of my home academic
fields, the general view — shaped in large part by the effects of a rising
dollar in the early 1980s, then a big fall after 1985 — has been that the negative
impact of a strong dollar on the trade balance takes two years or more to fully
manifest.
The negative effects of one of the two channels
through which the Fed has been trying to affect the economy are still largely
in the future.
I am less clear about the other one, mortgage rates:
housing investment has already been falling, dragging down growth. And although
it will surely continue to fall, I do not know whether it will be a bigger drag
looking forward.
What seems fairly clear, however, is that we have
yet to see anything like the full effects of Fed tightening on the economy.
What about inflation? Here, too, there are good
reasons to believe that there are long lags between policy changes and the
reported numbers. Perhaps most important is the way the Bureau of Labor
Statistics (BLS) measures the cost of housing, which largely reflects the
average amount paid by renters, which is then used to estimate an “imputed”
cost for homeowners — in effect, what they would be paying if they were renting
their dwellings.
This procedure makes sense for evaluating the cost
of living, but it can be problematic as a way of judging the current state of
the economy. Why? Because most renters have leases, so the amount they pay lags
far behind the rates paid by new renters. A recent study by the BLS found that
this lag averages about a year.
What this means is that the official measure of
shelter inflation, which is a large part of overall inflation and an even
larger part of various measures of underlying inflation, reflects conditions in
the housing market in late 2021, not conditions today. Back then, as it
happens, rents were rising at a double-digit rate — in large part, some
research suggests, because of the rise of remote work, which led people to want
more space.
But all of this appears to be behind us. A recent
analysis by Goldman Sachs estimated that market rents are currently rising at
an annual rate of only 3 percent, about the rate before the pandemic, and many
analysts expect rents to slow even further or perhaps even begin to fall. This
slowdown will eventually show up in official measures of inflation — but not
until sometime next year.
Is “true” inflation really coming down? Like many
economic observers, I was waiting with some trepidation for the recent release
of the Employment Cost Index, widely viewed as a better measure of wage growth
than the simple average wage. Would it contradict other data suggesting slowing
wages? Well, it did not.
Wages are still rising too fast to be consistent
with the Fed’s inflation target, but if the economy is really set to weaken,
wage growth will probably weaken too. Furthermore, it can be argued that past
wage growth, like surging rents, partly reflected a one-time adjustment to
pandemic-related shocks, which will go away over time.
So, does the Fed need to do more? Or has it already
done too much? It is a judgment call. There is, I would argue, a strong case to
be made that there is considerable future disinflation already in the pipeline.
But is it enough to justify a Fed pause after its next interest rate hike
(which is clearly going to happen)?
Well, as Kindleberger would have said, there are
enough measures out there to let you be either optimistic or pessimistic about
inflation, according to your temperament.
Over the past year, optimists like me were wrong, while
pessimists were right. But past results are no guarantee of future performance.
Read more Opinion and Analysis
Jordan News
.jpg)
.jpg)
