Falling unemployment and rising inflation are bringing the Federal Reserve closer to its goals more rapidly than policy makers had foreseen, and may justify raising interest rates as early as the end of the first quarter of 2015, St. Louis Fed President James Bullard said Thursday.
A rebound in U.S. economic growth in the second quarter following a drop in output in the first three months of the year confirmed the dismal first quarter was an anomaly in an otherwise improving trend, Mr. Bullard told The Wall Street Journal in a telephone interview. Hiring has also shown consistent strength, he said.
“Basically we’re way ahead of schedule for labor-market improvement,” Mr. Bullard said. He noted that former Fed Chairman Ben Bernanke said last summer the unemployment rate would likely be around 7% when the Fed wrapped up its bond-buying program. Instead, it was 6.2% in July, and “could go below 6% by the time we end bond buys,” Mr. Bullard said.
The Fed has indicated it will end the controversial asset purchases in October, and has said it will wait a “considerable time” after that to begin raising interest rates from near zero. The bond purchases are aimed at lowering long-term interest rates to spur spending, hiring and investment.
Many investors expect the Fed to start raising its benchmark short-term interest rate, the federal funds rate, sometime next summer, a view encouraged by some Fed officials. But Mr. Bullard thinks that might be waiting a little too long.
“The idea that the Fed might get behind the curve is a powerful one, and that’s certainly been the history of the institution. People are right to worry about that,” Mr. Bullard said.
Mr. Bullard said he did not share the sentiment of some of his colleagues, expressed in the Fed statement after its July meeting, that its benchmark rate may need to remain historically low “even after employment and inflation are near mandate-consistent levels.” He said he has not revised his view of the long-run fed funds rate as somewhere around 4%.
For this reason, Mr. Bullard thinks the Fed may need to raise rates more quickly than some of his colleagues do.
“It takes a long time to do this normalization–it’s like turning a supertanker in the ocean,” Mr. Bullard said. “Waiting too long might get us into trouble.”
The interview comes as many Fed officials and other central bankers from around the world prepare to gather next week at the Kansas City Fed’s annual symposium in Jackson Hole, Wyo.
In response to the financial crisis, recession and weak recovery, the Fed cut its fed-funds rate to near zero in December 2008 and has expanded its balance sheet to some $4.4 trillion with purchases of Treasury and mortgage bonds.
Mr. Bullard said this could make it harder for the Fed to exit when the time comes, but argued the central bank has sufficient tools to raise rates in a timely manner. For him, it is just a matter of getting that timing just right.
“The end of the first quarter of 2015 is still my preferred liftoff date” for raising the fed-funds rate, Mr. Bullard said.
Central Banker Heaven
I have finally reached the point where people are quoting me from the old days, but they have no idea they are doing so. They don’t know who I am (or was) so they don’t know it’s me they are quoting. Ten years after retiring from the Federal Reserve, I have reached exalted status of Anonymous.This happened on CNBC—last Monday, I believe—when a guest said something to the effect that only hawks go to central banker heaven. I believe he was suggesting that at some point Janet Yellen would have to turn more hawkish because she knew that doves don’t go to central banker heaven. The host asked him to elaborate on the central banker heaven thing, and he said something like it was just an old saying.
Background: In June and August 1999, I dissented from the Greenspan majority with they decided to bump up the Fed Funds rate based on projections that inflation would increase even though there was very little evidence of that in the real world, in my opinion. (I was fond back then of quoting Richard Pryor’s line, ‘Who are you going to believe, me or your own lying eyes?)
My dissents, which were less common back then than they are now, led one publication to call me the ‘Lone Star Loner.’ Shortly thereafter that phrase morphed into the “Lonesome Dove.” I didn’t like my budding reputation as a dove (‘soft on inflation’). Instead, I thought of myself as a kinder, gentler hawk. However, as a Texan by Choice, I liked the association with Larry McMurtry’s, Lonesome Dove, so I didn’t fight it very hard. In many, many speeches back then I discussed the hawk/dove issue and acknowledged that “doves don’t go to central banker heaven; only hawks need apply.” I also used it in a couple of poems, including one that follows.
First, a little background: The economy of the second half of the 1990 was extraordinary. A lasting surge in productivity growth made all the numbers better. Growth in output and employment was faster, and inflation was lower. The U.S. was leaving Europe in the dust. I felt that one reason for that was that the ECB was being too restrictive—too hawkish. I raised that question in an FOMC meeting, but it got no traction. After the meeting, as a couple other Reserve Bank Presidents and I were being driven to the airport (in a Grand Marquis—no Town Cars) they ribbed me. In response, I wrote the following poem in July 2001. Note the last line.
Give Growth A Chance
From the backseat of a Grand Marquis
My colleagues laughed at me
For having the temerity
To suggest the possibility
That Europe might have a new economy
If only the ECB
Would set it free.
What I’d asked was so naïve,
They could hardly believe
That I could conceive
Of such a policy reprieve.
And they really looked askance
When I suggested giving growth a chance.
I understand that monetary policy
Is not the main villain of the European odyssey.
A good diagnosis
Of Euro-sclerosis
Would place more responsibility
On labor market inflexibility.
Laws against firing
Discourage hiring.
And too high a safety net
Is sure to snare and abet
Those dead set
On avoiding sweat.
When it comes to the ECB
I understand it to be
Their single goal to protect the Euro nations
From inflations.
They said, ‘Rapid growth and low unemployment, Bob,
Is not the ECB’s job.’
But I wonder if Europe really got a bargain in
Its inflation targeting.
I ask my questions anyway
To see what the experts would say.
But they’ve learned their lesson well:
To avoid central banker hell,
Dodge rhetorical questions
That lead in that direction.
The lesson is, don’t run an economy hot
Or you will surely not
Go to central banker heaven.
- See more at: http://economyblog.ncpa.org/central-banker-heaven/#sthash.EuOcdGDe.dpuf
The Fed’s Vice Chairman, Stanley Fischer, States the Obvious and Creates a Buzz
In a speech in Sweden, apparently only the second one since becoming Vice Chairman of the Fed’s Board of Governors, Mr. Fischer said that both the U.S. and the global recoveries have been disappointing. Well, duh!That load of insight had people talking all day today on financial TV, including me on CNBC.
I take the ‘duh’ back. I’ve had enough experience to know how little control one has over how the press spins ones words. I’m pretty sure he didn’t claim to be original in those insights.
The press coverage over a statement so obvious does demonstrate one thing, at least: diminishing marginal utility. Mr. Fischer’s relative silence since becoming number two on the Board of Governors has made his words more valuable at the margin. He hasn’t taken us very far out the curve of diminishing marginal utility; so his words carry more weight.
The Fed’s job, as they probably still see it, is to conduct monetary policy to help the economy reach its growth potential without surpassing it and creating too much inflation. What Mr. Fischer was talking about was that potential. If the economy is capable of growing three to three and a half percent per year without accelerating inflation, then the potential growth rate is three to three and a half percent. That’s pretty much what it was assumed to be in my day, although it was probably a bit higher during the second half of the 1990’s when productivity growth accelerated. Faster productivity growth enabled the economy to have faster output and employment growth with less inflation and unemployment. It made everything better.
As Mr. Fischer noted, output and income growth depends largely on labor productivity (output per hour worked) and the supply of labor for production. In other words, the number of workers and their productivity.
We are all vaguely aware of the slowdown in productivity growth in recent years, but I was still surprised at how much it had slowed down. When you look it up at the Bureau of Labor Statistics, the first thing you learn is that productivity for all businesses increased at a 2.5 percent
rate in the second quarter of this year after falling 4.5 at an annual rate during the first quarter. You heard that right: productivity fell at a 4.5 percent rate in the first quarter when production declined much faster than hours worked.
The second thing you learn, when you look at the table, is that productivity growth was almost nonexistent during the previous three years: 2011 (+0.1%), 2012 (+1.0%), and 2013 (+0.9%). Okay, the way I figure it, productivity grew 2 percent in three years, or two-thirds of one percent per year. Then it declined to negative in the first half of 2014. The numbers, of course, are less-bad in the manufacturing sector.
This stagnate productivity growth means that a labor force of a give size produces hardly any more goods and services from one year to the next. Well, what about the size of the labor force? It’s been shrinking. The labor force participation rate—the people considered to be in the labor force who have jobs—was down to 62.9 percent in July. That is a 36 year low—not a low just since the financial crisis and recession. The downtrend in the size of the labor force as been going on for 36 years, and only accelerated lately.
Definitions of the labor force and whether a given person is in or out of it make the labor force participation rate a bit messy. A cruder, but simpler number is the employment/population ratio, which was only 59 percent in July. In some recent months that number was the lowest ever recorded.
We all know that unemployment is a waste. It keeps us from operating at full potential. But so are labor force dropouts, for whatever reason. Relative to our population, fewer and fewer people are working, producing goods and services. As Senator Gramm from Texas used to say: we have more and more people riding the wagon and fewer and fewer people pulling in the wagon. So, yes, our potential growth has been compromised; so policies to reach our potential will have to take that into account.
On CNBC today, I emphasized the above factors. The other guest in the segment wanted it clear that some of the unemployment and underemployment and the dropouts resulted from cyclical factors rather than secular factors and could be reduced with appropriate policies. Of course, that’s right. But I’m afraid that after our policy makers have done all they can do, we may still be disappointed in our slow growth economy.
I don’t have good answers. Conduct proper policies and hope that takes care of more of the problem than I suspect. Since we are apparently not quite having babies at the replacement rate of 2.1 per couple, I think there is a role for—dare I say it—immigration reform. We need more younger workers helping pull the wagon, particularly educated and skilled younger workers like those we graduate from our universities and refuse to let stay and work here.
While the politicians delay dealing with the stickier issues of immigration reform, surely they could get together on abolishing the limits on H1b visas for young educated foreign workers.
- See more at: http://economyblog.ncpa.org/the-feds-vice-chairman-stanley-fischer-states-the-obvious-and-creates-a-buzz/#sthash.GDYYDMgc.dpuf
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