- - Tuesday, February 12, 2019

Federal Reserve Chairman Jerome Powell has decided to listen more to markets and embrace a healthy agnosticism about economics.

During his first year, the Fed increased the federal funds rate — the rate banks receive on deposits at the central bank and pay each other on overnight loans — by a full point to about 2.4 percent — and continued to run down holdings of mortgage back securities accumulated during the financial crisis.

The former strongly affects short-term business loans, credit cards and auto rates, while the latter significantly influences the markets for long-term corporate bonds and home mortgages.

Through December, the stock market fell a record seven times in a row following Fed policy committee meetings and in a stunning vote of no confidence, dramatically after the chairman spoke in December.

Mr. Powell has backed off. He won’t be raising the federal funds rates again any time soon and has promised to be more cautious about liquidating the Fed’s holdings of the mortgage-backed securities and Treasuries.



Pundits have concluded that the Fed has gone from trying to wean markets from cheap credit to promiscuity, giving the equity investors exactly what they want.

Nothing could be further from the truth — money isn’t artificially cheap anymore.

Over the last decade, credit markets have changed profoundly. More supply: Sluggish growth and endemic structural woes in Europe, China and Japan have increased the dollar’s role in global commerce. Consequently, foreign investors and central banks are holding more Treasuries and other dollar denominated securities and bank deposits.

Less demand: Consumers are more cautious about credit card debt and too many of them are burdened by excessive student loans to consider too much borrowing for homes.

These combine to significantly lower the neutral rate of interest. At 2.4 percent for the federal funds rate and 4.4 percent to 4.7 percent for mortgages, the Fed has found the sweet spot for hitting its 2 percent inflation target and maintaining a solid pace of economic growth. For example, as mortgages inched up to 4.9 percent in November, new home sales tanked but as rates slipped back in December, buyers returned to the market.

All of this flies in the face of what Fed economists crank from their models. At 4 percent unemployment, the recent rapid pace of hiring should be pushing wages off the charts. For the last decade, economists harped productivity growth is dead — all the good stuff has been invented.

In January, the economy created 304,000 jobs and wages were up 3.2 percent from a year ago but inflation remains remarkably subdued. Employers are finding ways to attract folks who quit looking for work during the Obama years back into the labor market and investing heavily in training to assist the handicapped hold satisfying positions and the unskilled find career paths.

Economists must be playing a lot of games and betting on sports with their hand-held devices and laptops while the rest of humanity is using those to harvest benefits from artificial intelligence. The latest data indicates productivity is clipping along well above the 1.2 percent rate necessary to accommodate wage increases of 3.2 percent and inflation at or below 2 percent.

So many things are working to keep prices from flying out of control. For example, the excess profits consumer products companies reap from mixing 25 cents worth of ammonia and lemon scent to sell window cleaner at $3.29 is under assault by Amazon and discount chains offering own-label products at fairer prices.

In China, the Communist Party is panicking to do most anything to keep the factories rolling — including never-repay loans for its increasingly dominant state-owned enterprises. That pushes down prices everywhere. More broadly, excess capacity abounds for manufacturing worldwide.

Oil and gas prices and the cost of just about everything else that uses that stuff have been pushed down by the shale boom in West Texas, where drilling is getting ever more efficient.

Economists’ models forecast the future by churning data — mostly domestic information — from the past several decades, and simply don’t capture those sorts of structural changes.

Mr. Powell can’t very well say economics is bunk — but I can. And though he can’t fire those jug heads, he doesn’t have to listen to them.

Good for him and good riddance to the Dismal Science.

• Peter Morici is an economist and business professor at the University of Maryland, and a national columnist.

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