We now know a lot more about the probable course of the economy than we did a few months ago, and are likely to learn even more in the next few weeks when the jobs report is released on April 4.
One thing we do know is that weather matters, at least extreme weather of the snowy sort that afflicted a good part of America in recent months. But now spring has sprung, the grass has riz, and merchants and car dealers can stop wondering where the customers is, to borrow a bit of doggerel from Ogden Nash. For the next few quarters that particular headwind to more rapid growth will not have the chilling effect on the economy that it has had in past quarters.
Second, we know that our foreseeable future includes zero-to-low interest rates. And not only because stock and bond markets were spooked into sell-offs when Janet Yellen the new Fed chair (Yellen has instructed her staff to use that gender-neutral title when addressing her) made a novice’s error at her first press conference. She responded to a request to define the “considerable period” that will elapse before the Fed raises rates by suggesting that the rates might start up this Fall, sooner than markets had been expecting. She forgot the first rule of policy-makers’ forecasting: give ‘em a number, or give ‘em a date, but never ever give ‘em both a number and a date. Her hint of action sooner rather than later notwithstanding, there is little doubt that the Fed will keep rates unusually low, rising if at all very slowly, as markets realized within 24 hours and bounced back.
- Thirteen of the sixteen members of the monetary policy committee, or Federal Open Market Committee (FOMC) in the technical jargon of the central bank, do not expect to raise rates until 2015. That gives Yellen a solid majority of members who want to avoid an increase in interest rates until next year.
- A fall in the unemployment rate to 6.5 percent will no longer trigger a tightening of policy. The unemployment rate is only one indicator, and these days not a very good one, of the strength of the labor market. A drop in the unemployment rate produced by a continued fall in the labor force participation rate is not good news. A drop in the headline unemployment rate while many people are involuntarily working part-time is not unambiguous good news. Neither is an increase in the portion of the unemployed who have been out-of-work for an extended period, or the failure of wages to rise. All of these indicators will have to be flashing good news before the FOMC considers raising rates, which Yellen promises will be only at a moderate pace. Doubt that and re-read Yellen’s many strong statements on the socially and economically devastating effects of less than full employment.
- Yellen also believes that monetary policy must be kept loose because fiscal policy is too tight. She has in the past characterized current fiscal policy as “unusually restrictive … an unusual drag”, and last week said it is “tighter than would be expected. That lines her up with President Obama and hawkish Republicans who desire to avoid cuts in the military budget has increased now that Vladimir Putin has torn up the boundary settlements that have prevailed since World War II.
- The Fed will only consider the economy discharged from the intensive care unit when inflation has risen from its current rate of around 1 percent to the Fed’s 2 percent target, and “maximum employment” prevails, which Yellen wisely declined to quantify: my guess is that means an unemployment rate of 5 percent and a steadily rising work force participation rate. Even when these goals are reached, the Fed will try to keep interest rates low to make certain the recovery is durable.
Of course, it is always possible that Fed policy will change. Members of the monetary policy committee claim to be “data-driven,” or, in ordinary language, their views are subject to change without much notice. Those views are based on forecasts regularly revised as reality bites (revisions are forecasters’ way of never having to say I’m sorry for my earlier, erroneous forecast.) Remember: at the same time as Yellen offered future guidance she announced the abandonment of previous guidance. Some critics wonder if the guidance game, which consists of opaque descriptions of policies based on fallible forecasts, isn’t doing more harm than good.
So much for the Fed, which is attracting almost all of analysts’ attention, largely because what is widely considered Yellen’s press-conference gaffe — comments ranged from “less than stellar” to “disastrous” — rattled investors with huge holdings of interest-rate sensitive financial instruments. Ironic, given Yellen’s pride in her role in developing the Fed’s communication policy.
Those who fear a rise in interest rates say that would hurt both bond and equity markets, and not incidentally the recovery. Others argue that such an increase indicates the economy has recovered, and that corporate profits and therefore share prices are certain to rise. As the shill at a carnival or casino barks, “You pays your money and you takes your choice.”
In the end, if we are to move on from “a series of years in which growth has been disappointing”, as Yellen describes the slowest economic recovery in modern memory, to a full recovery, the economy will have to overcome the headwinds that have held it back.
The good news is that the several headwinds are losing force.
- The weather-related drag won’t be repeated.
- Household balance sheets, which were in disrepair when house and share prices hit their lows, are in better shape, at least for some Americans, in part because the Fed’s zero interest rate policy has driven up asset prices.
- The number of underwater mortgages — those that exceed the value of the owners’ homes — is down, giving those owners easier access to credit, although credit remains difficult for many consumers and small businessmen to obtain as banks respond to regulators’ pressure by reducing the riskiness of their loan portfolios.
- In February, factory output recorded its largest increase in six months.
- A global recovery seems to be in the making despite problems in China and nervousness created by Vladimir Putin’s decision to opt for peace, a piece of Ukraine as Mel Brooks would put it.
- The recent decline in house sales, real estate agents tell me, is more a result of a lack of inventory than of the admittedly non-trivial effect of higher interest rates and the recent price spurt.
- And 29 of 30 big banks last week passed the regulators’ stress tests with flying colors.
All the pieces are in place for more rapid economic growth, although whether this will translate into more rapid job creation remains to be seen.