Echoes of Swinging ’60s fan fears of resurgent inflation
U.S. unemployment looks to be headed down to levels last seen when The Monkees ruled the pop charts and Ford Mustangs roamed the roads. And that's got some economists and investors worried.
Yes, it was the Swinging '60s — 1966 to be precise. Joblessness, which now stands at 4.1 percent, fell as low as 3.6 percent. That's the same rate that Federal Reserve policymakers see the U.S. hitting at the end of next year. And inflation, after being quiescent for years, took off back then, virtually doubling over the year to 3 percent.
"There's a risk that something like that could happen again," said Joachim Fels, global economic adviser at Pacific Investment Management Co., which oversees $1.75 trillion in assets.
That could shock financial markets that have become accustomed to muted price pressures and easy monetary policy.
The government's monthly jobs report on Friday is projected to show the unemployment rate ticked down to 4 percent in March as employers added another 195,000 workers, according to the median forecasts of economists surveyed by Bloomberg ahead of the release.
It's not only the labor market that exhibits some parallels to the mid1960s. Just as now, fiscal policy was pumped up, by tax cuts first pushed by President John F. Kennedy and by the gunsand-butter spending splurge of his successor, Lyndon Baines Johnson.
Monetary policy was accommodative — and Fed officials were under political pressure to keep it that way, just as may be starting to happen now. After being named head of President Donald Trump's National Economic Council, Larry Kudlow urged the central bank on March 14 to "just let it rip, for heaven's sake."
"This reminds me of the late 1960s when we experimented with low rates and fiscal stimulus to keep the economy at full employment and fund the Vietnam War," Paul Tudor Jones, founder of hedge fund Tudor Investment Corp., said in comments to Goldman Sachs published Feb. 28. "We are setting the stage for accelerating inflation, just as we did in the late '60s."
Good vibrations?
To be sure, repeated forecasts by inflationphobes that prices were about to take off have been wide of the mark. As measured by the Commerce Department's personal consumption expenditures price index, inflation stood at 1.8 percent in February and has been more or less consistently below the Fed's 2 percent goal since the target was introduced six years ago.
Former Fed Governor Frederic Mishkin argued that a big difference from the 1960s is that inflation expectations now are well-anchored. What's more, the Fed recognizes how important it is that they remain so.
As a result, the likelihood of getting a "very sharp acceleration of inflation is much, much, much less" than back then, Mishkin, who is now a professor at Columbia University, said March 21 on Bloomberg Television.
Best that can be judged, inflation expectations were anchored back in the early 1960s as well, said Matthew Luzzetti, senior economist with Deutsche Bank in New York. But that didn't prevent inflation from increasing, pushing up expectations in the process.
The 1966 price spurt was just the beginning, of course. By the end of the decade, inflation reached almost 5 percent and, despite a mild recession at that time, went on to double-digit levels in the 1970s — something that nobody is forecasting will happen again today.
Labor unions were stronger and wage growth was faster in the mid-1960s than they are now. But unit labor costs — a key ingredient in the inflation process — were actually rising more slowly heading into 1966, thanks to bigger productivity improvements.