Tuesday, October 2, 2018

Makes Me Shudder, A Little...

When discussing the prospects for inflation this morning, Fed Chair J. Powell said the following:
"... many factors, including better conduct of monetary policy over the past few decades have greatly reduced, but not eliminated, the effects that tight labor markets have had on inflation."
Well, okay, while I'm not suggesting that the Fed hasn't done a decent job nursing the economy along since the Great Recession, in terms of inflation, lack thereof, in my view it has more to do with technology (read productivity) gains, globalization, and justifiable tepidness in the aftermath of the economic tsunami of 2008 than it does monetary policy. 

In any event, his commentary today makes me shudder, just a bit; as it reminds of the following from Fed Chair B. Bernanke's 2004 speech to Washington D.C.'s Eastern Economic Association:
"The historical pattern of changes in the volatilities of output growth and inflation gives some credence to the idea that better monetary policy may have been a major contributor to increased economic stability."
Then, ironically, came the "greatest recession since the great depression"!

So will Chair Powell be proven correct in his suggestion that, among other things, monetary policy is markedly reducing the effects of tight labor markets on inflation? Or will this morning's commentary turn out to be yet another of those self-congratulations (endemic to policy making, and politics) that so often precedes an abrupt change in trend.

Under the surface data suggest that it could very well be the latter. For example, here's a look at the NY Fed's underlying inflation gauge (red shaded areas are past recessions):

No comments:

Post a Comment