Needed: A steady economic hand

The Fed should take a long view, and not be buffeted by the clamor over incremental changes in imprecise monthly data.

The clamor for the Fed to reduce interest rates after each incremental month-to-month change in various data points is economically unhealthy. Primarily because the Fed pays attention to the clamor and too frequently in the past has responded to it.

The latest CPI figure clocking in at a 2.9% annual rate of increase supposedly clinches the case for the Fed to begin lowering rates in September, something Fed Chairman Jay Powell already indicated was highly likely.

The unemployment rate ticking up from 4.1% to 4.3%, coupled with a reduced number of new jobs created, caused some in the financial commentariat to call for an immediate emergency meeting to enact a big rate cut.

Stock markets swooned then rallied as the data points rolled by.

What the economy really needs is a broader perspective and a steady economic hand. 

After rising to 9%, inflation has retreated. But it has remained stuck for some time at 2.5% to 3%. An inflation rate in that range is still disruptive, economically and politically. Meanwhile, the federal government is still running a $2 trillion deficit and the Fed still has a bloated balance sheet of in excess of $7 trillion. Inflationary pressures persist. 

In reality, there is no meaningful macroeconomic difference between an unemployment rate of 4.1% and 4.3%. The imprecision in the way in which this rate is calculated makes it uncertain whether there has actually been a change. Economist Irwin Stelzer is fond of saying that decimal points are God’s way of proving that economists do have a sense of humor. 

The imprecision in the calculation of the new jobs number is even greater, and this number is frequently the subject of revision, sometimes substantial, as additional data flows in.

The American economy is too big, with too many moving parts, to collect data sufficiently precise to effectuate macroeconomic management on a month-to-month basis, or even quarter-to-quarter. Moreover, the tools available to the Fed are too blunt, and also insufficiently precise, to pull off the stunt even if empowered with comprehensive and perfectly precise data. The track record of the Fed correctly anticipating the effects of its policy decisions is particularly bad over the last decade or so. 

Right now, economic conditions are decent, except for the stubbornness of the elevated inflation rate. What the economy really needs is a period of a steady hand in monetary, fiscal, and regulatory policy. If given that, market forces would drive expanding prosperity and opportunity, much as it did in the 1980s.

Unfortunately, a steady hand isn’t on the ballot this November. Both presidential candidates are proposing unproductive, continuing disruptions.

According to Kamala Harris, inflation has been caused by corporate price-gouging. Apparently promiscuous monetary and fiscal policy has had nothing to do with it. 

This is a brazen attempt at blame-shifting. If American corporations have that kind of price-setting power, why did the country have four decades of low inflation? You know, the period that preceded the promiscuous fiscal policy.

Harris’s remedy is price controls. She has already proposed them for food, rents, and medicine. I suspect that’s only the beginning. Inflation, after all, is economy wide. 

In all of economics, there is no more discredited a policy than price controls. 

The Biden administration has been a steady stream of regulatory disruptions. Harris promises more of the same.

Donald Trump is an easy money guy who wants to undermine the independence of the Fed. It should be remembered that he was pushing the Fed incessantly to lower interest rates even further as he was leaving office, just on the precipice of the outbreak of an inflationary eruption that hit 9%. And the promiscuous fiscal policy began on his watch, and at his urging. 

If a president really wanted to do something constructive to get inflation under control, he or she would make proposals to substantially reduce the deficit, which creates inflationary pressures and makes the Fed’s job tougher. Instead, both candidates are issuing proposals that will increase the federal deficit nearly every time they open their mouth. 

The problem with the Fed reducing its interest rate in September isn’t necessarily the reduction itself. As there is no meaningful macroeconomic difference between a 4.1% and a 4.3% unemployment rate, there’s no meaningful macroeconomic difference between a 5.25% and a 5% Fed rate. 

The problem is that it will be interpreted as a return to easy money, with additional rate cuts to come, and a return to the Fed attempting to fine-tune short-term macroeconomic performance rather than maintaining a steady hand. That will create expectations that, again, the Fed has historically been too influenced by and too prone to accommodate.

Interest rates are not historically high. Inflation remains a disruptive force. The Fed, an agency of the federal government, owns way too much of the national debt and the country’s supply of mortgage-backed securities. Fiscal policy is all but certain to continue to be a source of inflationary pressures. Easy money and being buffeted by monthly data points isn’t the right course of action. 

We won’t get a steady hand from our politicians. The Fed is our best hope. 

Reach Robb at robtrobb@gmail.com.