Eight years after the financial crisis the Federal Reserve has finally changed its assessment of the American economy.
“Before, we had to press down on the gas pedal trying to give the economy all of the oomph that we possibly could,” Fed Chair Yellen said on Monday in Ann Arbor, Michigan. We are trying to “give it some gas, but not so much that we’re pushing down hard on the accelerator.”
To elaborate on the Fed's metaphor, the U.S. economy has gone from being an engine so out of tune that it needed full throttle just to keep turning over to one where the mechanic is testing her repairs by lightening the accelerator and listening for the first signs of a stall.
It has taken the FOMC 15 months to bring the Fed Funds rate to one percent, after being effectively at zero for seven years. During that time the central bank, in its own words, had to floor the accelerator just to keep the economic engine turning over.
The result of all of that monetary acceleration was 2.1 percent average growth and the weakest recovery in post-war history.
Since the first 25 basis point hike in December 2015 annualized quarter to quarter GDP slipped to 2.0 percent in 2016. The second half's 2.8 percent expansion has fallen sharply to 0.6 percent in the Atlanta Fed's GDPNow estimate for the just ended first quarter. If the Georgian regional bank is correct the FOMC will have hiked rates twice on an economy expanding at six month rate of 1.35 percent.
With unemployment at 4.5 percent, core PCE inflation at 1.8 percent and headl;ine at 2.1 percent the Fed can claim to have reached its twin goals of full employment and 2 percent inflation.
But neither of those statistics make a great deal of sense in an economy growing less than 1.5 percent in the last six months or that expanded on an annual basis just 1.6 percent last year. Wage gains that have barely outstripped inflation for almost a decade and chronically low productivity are two more signs that the central bank's traditional economic measures may not be capturing the reality of the U.S. economy in 2017.
“We want to be ahead of the curve and not behind it,” Ms Yellen said. “We don’t want to be in a position where we have to raise rates rapidly, which could conceivably cause a recession.”
A central bank that is worried about being behind the rate curve and possibly precipitating a recession in an economy growing and inflating at 2 percent is probably a bank that understands just how uncertain its own analysis really is.
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