Amount stability, regardless of how it is measured and defined, is the ultimate litmus test of money policy.
And inflation is always — regardless of sociopolitical outlook — a monetary occasion.
Those are the key tenets of the Chicago school of economics, as well as the “killer” disagreements of one of its best known proponents — the Nobel laureate Milton Friedman.
Friedman was as likely as not smiling somewhere when President Donald Trump told the Federal Restraint last week that “I don’t like all of this work that we’re putting into the saving and then I see rates going up.” As a graduate student, I remember the Friedman grin that looked relish he was saying “I told you so.”
What Trump said was a paraphrase of Friedman’s petition that fiscal policy stimuli were ineffective — that is, their medium-term striking is zero or negative, because the ensuing higher inflation and budget losses force the Fed to initiate credit tightening that usually leads to advancement recessions and rising unemployment.
Friedman was basing that view on his observed research (part of his Nobel distinction) showing the vanishing fiscal multiplier, which is budgetary policy’s stimulus to economic activity. That was also part of his state fight against deficit-financed economic policies, advocates of big government and an ever-expanding trade sector.
In case you are wondering what Friedman did advise, you can probably speculate that money for him was the only policy lever. Pick any monetary aggregate (a besides of the money stock), he said, preferably the one whose growth is highly correlated with the lump of the economy, and keep it moving along on a path that is consistent with figure stability.
Now, that brings us back to the Fed and the legion of its critics and would-be advisors.
From the more than, one can easily infer that inflation is the only binding constraint on the Fed’s way. Those who disagree with that conclusion are mostly the people avowing that the Fed is Wall Street’s handmaiden, regularly caving to government urge in the run-up to elections, and the key architect of the (four-year) election business cycle.
I look at that as fundamentally irrelevant chatter that in no way invalidates the view that inflation — or, numerous precisely, inflation expectations — is a guide the Fed can only ignore at the peril of debilitating dips and crashing asset values.
Where do we stand on inflation now?
Not sitting pulchritudinous, really. The key inflation indicators are hitting at, or above, the upper levels of their quarry ranges. They are showing an accelerating pattern rather than a stabilizing thing. In particular, that’s the case with the personal consumption expenditures guide and the consumer price index.
Indicators underlying inflation pressures, such as the constituent labor costs and producer prices, are not providing any grounds for optimism either.
The element labor costs (wages minus labor productivity) in the fourth district of last year and the first quarter of this year shot up at an for the most part annual rate of 1.6 percent — a big jump from zero improvement in the first nine months of last year. That is quite a hit to profit margins that ordain force businesses to respond with rising prices, which again stick in a growing economy.
That is typically what happens on the way to an accelerating worldwide price inflation.
Producer prices last month told the that having been said story with an annual increase of 4.3 percent. They were high-pressure by energy costs soaring at an annual rate of 17.2 percent. All that has already bring about its way to consumer wallets and corporate balance sheets.
The most recent responsibility surveys are pointing to high activity levels, rising capacity constraints and slowing articulation schedules, with prices in June showing more than two years of consecutive monthly distends.
Trade disputes — if they were to lead to supply shortages and expense distortions — are another problem in the current inflation outlook. Sadly, the Chinese and the Europeans are likely to fight to keep their surpluses on U.S. trades.
Speaking in the name of the EU at the G-20 bankroll ministers’ meeting last Saturday, France refused to even reckon the American offer. The Chinese did the same thing, but much more elegantly: Beijing did not send its key occupation negotiator, leaving the EU and the IMF to gang up on the U.S.
And then there is a hugely expansionary financial policy the Fed has to contend with. Last Thursday, the U.S. Office of Management and Budget told that the deficit for this fiscal year, ending September 30, determination come in at $890 billion — more than double the estimate of $440 billion it had proclaimed in March 2017.
How is the Fed reacting to all that?
Liquidity withdrawals are continuing. In the course of the instant quarter, the Fed’s balance sheet shrank by $150 billion, showing a 3 percent loss from its year-earlier levels, but still remaining at a massive $3.6 trillion on July 18. That is a absolutely gradual and a very cautious pace of a long-overdue “policy normalization.”
The linkage markets are reacting in kind. The Treasury’s yield curve has been savagely stable since the beginning of July, with a mild tension beginning on the benchmark 10-year note. The real short-term interest rate, regular by the effective federal funds rate and the CPI, is still minus 1 percent, representing a vastly expansionary monetary policy.
Trump’s displeasure about the Fed’s objective to keep rising interest rates sounds like an unwise dig at a inside bank that seems hopelessly behind the curve in preventing an inflationary flare-up.
The president could improve by getting the Russians and the Saudis to pump more oil to bring energy expenditures down. So far this year, oil prices are up 18.4 percent, and there is no influential how far the U.S. consumer price inflation could go if energy prices were to preserve continue rising.
That is all in Trump’s hands. There is nothing the Fed can do about it.
Fixed-income peddles look like a good place to avoid. Defensive equity stances are my choice.
Commentary by Michael Ivanovitch, an independent analyst focusing on smashing economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, universal economist at the Federal Reserve Bank of New York, and taught economics at Columbia Duty School.