Fed on verge of get­ting back to nor­mal

The Pak Banker - - OPINION - Barry Ritholtz

Ispent the past week in Maine, fish­ing for small­mouth bass and dis­cussing pol­icy with large­mouth econ­o­mists. It is an an­nual trip, and one where the wine flows freely and the de­bate is sin­cere and ro­bust and per­haps best of all, very un­guarded.

The open na­ture of the dis­cus­sion is the re­sult of the Chatham House Rule; it gov­erns the pro­ceed­ings, and en­sures that "par­tic­i­pants are free to use the in­for­ma­tion re­ceived, but nei­ther the iden­tity nor the af­fil­i­a­tion of the speaker(s), nor that of any other par­tic­i­pant, may be re­vealed." I can tell you the ti­tles of peo­ple who were there, but no one can be iden­ti­fied, di­rectly or in­di­rectly.

That frees up peo­ple to be less cir­cum­spect, more blunt and hon­est. They are less po­lit­i­cally cor­rect in a pro­fes­sional or­ga­ni­za­tional sense, mean­ing they are free from sim­ply re­peat­ing of­fi­cial pol­icy line. You find out some in­ter­est­ing things when a media han­dler isn't hov­er­ing nearby ready to cut off the con­ver­sa­tion at the first sign of can­did dis­cus­sion.

The cost of en­try re­quires that each per­son ship "a half case of a fa­vorite wine." It flows from lunch un­til late in the evening, so in ad­di­tion to the lack of a nearby PR per­son, there is also that ad­di­tional con­ver­sa­tional lu­bri­cant. Hence, peo­ple tend to dis­cuss pol­icy mat­ters in a way that you would never hear on tele­vi­sion.

I would or­der the fea­tured top­ics as fol- lows: em­ploy­ment, com­mod­ity prices, wages, in­fla­tion, the Repub­li­can de­bate, China, hous­ing and energy. The theme un­der­ly­ing all of these de­bates was the prospec­tive Fed­eral Re­serve rate in­crease.

I of­ten par­tic­i­pated in or ob­served sev­eral well-oiled de­bates. Per­haps the one that would be most in­ter­est­ing to read­ers of this col­umn in­volved a re­gional Fed pres­i­dent and a chief economist at a ma­jor wire house (there were mul­ti­ples of each of these, so I am not out­ing any­one). Let's call these two peo­ple Ros­alie and Char­lene.

In this de­bate, Ros­alie made the case that the econ­omy, although im­prov­ing, is still weak. Wage gains are dis­ap­point­ing, the hous­ing mar­ket is still be­low par and un­der­em­ploy­ment has be­come a fea­ture of the sys­tem. That was be­fore we looked abroad, where China's stock bub­ble is pop­ping and the econ­omy is slow­ing and is per­haps al­ready be­low a 7 per­cent growth rate. "We have not yet achieved es­cape ve­loc­ity," she said. "Now is not the time to raise rates."

Char­lene's re­sponse was sim­ple: I don't know what "es­cape ve­loc­ity means" from a pol­icy per­spec­tive. It cer­tainly isn't part of the Fed's dual man­date. Re­gard­less, as of last month's em­ploy­ment re­port, the U.S. has cre­ated more than 11 mil­lion jobs since the end of the Great Re­ces­sion in June 2009. In­fla­tion is con­tained, but we are see­ing early signs that the slack in the la­bor mar­ket is fi­nally be­ing re­placed by wage growth. The num­ber of job open­ings is ris­ing, com­pa­nies are find­ing it harder to re­place work­ers and la­bor mo­bil­ity is im­prov­ing.

Per­haps the most telling part of the dis­cus­sion in­volved a com­par­i­son be­tween the ini­tial pe­riod of zero in­ter­est rate pol­icy and to­day. ZIRP be­came a Fed pol­icy amid a fi­nan­cial credit cri­sis and the worst eco­nomic slump since the 1930s. The econ­omy was shed­ding 800,000 jobs a month, gross do­mes­tic prod­uct was plum­met­ing and stock mar­ket val­ues were cut in half. Credit had frozen and banks needed bailouts. There was gen­uine panic among pro­fes­sion­als across the eco­nomic spec­trum.

To­day, the panic is a re­ced­ing mem­ory. In­ter­est at zero is an emer­gency set­ting. Why do we still have a Fed pol­icy de­signed for an econ­omy that needed life-sup­port?

At least, that's how I re­mem­ber it. As noted ear­lier, there was some con­sump­tion of wine (a very nice Napa Caber­net Sauvi­gnon), and it is quite likely that my own se­lec­tive per­cep­tion and re­ten­tion is at work here. It is even pos­si­ble that I aided Char­lene in her counter to Ros­alie. But in the sober light of day the part of the de­bate that stays with me is the ques­tion of con­tin­ued need for a pol­icy in­tended for an eco­nomic emer­gency.

So don't think of it as rates go­ing higher; think of it as mov­ing to nor­mal.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.