Three Hidden Words from Fed Insiders Point to Much
Higher Rates
https://www.bloomberg.com/news/articles/2022-10-19/fed-staff-rethinks-economy-s-speed-limit-portending-more-hikes
Craig Torres notes:
Tucked within 12 dense pages describing the Fed’s September policy meeting last week was a statement concerning a seemingly innocuous yet vital estimate that the staff use as a building block for internal economic forecasts.
Their gauge of US potential output was “revised down significantly,” the minutes showed, due to disappointing productivity growth and slow gains in labor force participation.
Potential gross domestic product is essentially an estimate of how fast the economy can run without breaking a sweat in the form of tightening resources and higher inflation. The new estimate was not disclosed -- nor was the prior one.
Even so, “the policy implication is significant,” said Anna Wong, Bloomberg chief US economist. “Lower potential growth means the economy has been more overheated last year and this year than realized, and it will take more rate hikes or a longer period of below-trend growth to close the output gap,” said Wong, a former Fed economist.
EARLY WARNING:
The Fed’s risky quest for maximum employment
by VIVEKANAND JAYAKUMAR | The Hill, 08/17/21
https://thehill.com/opinion/finance/568134-the-feds-risky-quest-for-maximum-employment/
In their quest for a full labor market recovery that includes a boost in labor force participation of marginalized groups, central bankers are well-advised to be cognizant of potential challenges in determining full-employment levels in an economy that is undergoing significant structural shifts, many of which were instigated by the pandemic shock. There are two related questions confronting Fed officials at present. How much labor market slack still remains? Are pre-pandemic levels for key labor market metrics attainable without creating significant inflationary pressures?...
The extent of labor market slack may therefore be overstated. Many of the existing labor market frictions are going to take some time to play out. Consequently, the Fed faces the risk of making a serious error on the inflation front by continuing to stick with ultra-accommodative monetary policies. Upward pricing pressures are persisting as underlying demand remains robust even in the face of widespread supply constraints.
The Fed’s quest for maximum employment may prove to be quixotic if it sticks to the unrealistic goal of returning the labor market to a state prevalent just prior to the pandemic shock.
https://www.bloomberg.com/news/articles/2022-10-19/fed-staff-rethinks-economy-s-speed-limit-portending-more-hikes
Craig Torres notes:
Tucked within 12 dense pages describing the Fed’s September policy meeting last week was a statement concerning a seemingly innocuous yet vital estimate that the staff use as a building block for internal economic forecasts.
Their gauge of US potential output was “revised down significantly,” the minutes showed, due to disappointing productivity growth and slow gains in labor force participation.
Potential gross domestic product is essentially an estimate of how fast the economy can run without breaking a sweat in the form of tightening resources and higher inflation. The new estimate was not disclosed -- nor was the prior one.
Even so, “the policy implication is significant,” said Anna Wong, Bloomberg chief US economist. “Lower potential growth means the economy has been more overheated last year and this year than realized, and it will take more rate hikes or a longer period of below-trend growth to close the output gap,” said Wong, a former Fed economist.
https://thehill.com/opinion/finance/568134-the-feds-risky-quest-for-maximum-employment/
In their quest for a full labor market recovery that includes a boost in labor force participation of marginalized groups, central bankers are well-advised to be cognizant of potential challenges in determining full-employment levels in an economy that is undergoing significant structural shifts, many of which were instigated by the pandemic shock. There are two related questions confronting Fed officials at present. How much labor market slack still remains? Are pre-pandemic levels for key labor market metrics attainable without creating significant inflationary pressures?...
The extent of labor market slack may therefore be overstated. Many of the existing labor market frictions are going to take some time to play out. Consequently, the Fed faces the risk of making a serious error on the inflation front by continuing to stick with ultra-accommodative monetary policies. Upward pricing pressures are persisting as underlying demand remains robust even in the face of widespread supply constraints.
The Fed’s quest for maximum employment may prove to be quixotic if it sticks to the unrealistic goal of returning the labor market to a state prevalent just prior to the pandemic shock.