Fed on Verge of Getting Back to Normal
I spent the past week in Maine, fishing for smallmouth bass and discussing policy with largemouth economists. It is an annual trip, and one where the wine flows freely and the debate is sincere and robust and perhaps best of all, very unguarded.
The open nature of the discussion is the result of the Chatham House Rule; it governs the proceedings, and ensures that "participants are free to use the information received, but neither the identity nor the affiliation of the speaker(s), nor that of any other participant, may be revealed." I can tell you the titles of people who were there, but no one can be identified, directly or indirectly.
That frees up people to be less circumspect, more blunt and honest. They are less politically correct in a professional organizational sense, meaning they are free from simply repeating official policy line. You find out some interesting things when a media handler isn't hovering nearby ready to cut off the conversation at the first sign of candid discussion.
The cost of entry requires that each person ship "a half case of a favorite wine." It flows from lunch until late in the evening, so in addition to the lack of a nearby PR person, there is also that additional conversational lubricant. Hence, people tend to discuss policy matters in a way that you would never hear on television.
I would order the featured topics as follows: employment, commodity prices, wages, inflation, the Republican debate, China, housing and energy. The theme underlying all of these debates was the prospective Federal Reserve rate increase.
I often participated in or observed several well-oiled debates. Perhaps the one that would be most interesting to readers of this column involved a regional Fed president and a chief economist at a major wire house (there were multiples of each of these, so I am not outing anyone). Let's call these two people Rosalie and Charlene.
In this debate, Rosalie made the case that the economy, although improving, is still weak. Wage gains are disappointing, the housing market is still below par and underemployment has become a feature of the system. That was before we looked abroad, where China's stock bubble is popping and the economy is slowing and is perhaps already below a 7 percent growth rate. "We have not yet achieved escape velocity," she said. "Now is not the time to raise rates."
Charlene's response was simple: I don't know what "escape velocity means" from a policy perspective. It certainly isn't part of the Fed's dual mandate. Regardless, as of last month's employment report, the U.S. has created more than 11 million jobs since the end of the Great Recession in June 2009. Inflation is contained, but we are seeing early signs that the slack in the labor market is finally being replaced by wage growth. The number of job openings is rising, companies are finding it harder to replace workers and labor mobility is improving.
Perhaps the most telling part of the discussion involved a comparison between the initial period of zero interest rate policy and today. ZIRP became a Fed policy amid a financial credit crisis and the worst economic slump since the 1930s. The economy was shedding 800,000 jobs a month, gross domestic product was plummeting and stock market values were cut in half. Credit had frozen and banks needed bailouts. There was genuine panic among professionals across the economic spectrum.
Today, the panic is a receding memory. Interest at zero is an emergency setting. Why do we still have a Fed policy designed for an economy that needed life-support?
At least, that's how I remember it. As noted earlier, there was some consumption of wine (a very nice Napa Cabernet Sauvignon), and it is quite likely that my own selective perception and retention is at work here. It is even possible that I aided Charlene in her counter to Rosalie. But in the sober light of day the part of the debate that stays with me is the question of continued need for a policy intended for an economic emergency.
So don't think of it as rates going higher; think of it as moving to normal.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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