US Fed on quest for uni­corn of mon­e­tary pol­icy: The soft land­ing

Kuwait Times - - Business -

WASH­ING­TON: The US cen­tral bank is on a quest for a myth­i­cal goal: keep­ing steady eco­nomic growth without al­low­ing in­fla­tion to catch fire. This so-called soft-land­ing is the uni­corn of cen­tral bank­ing, rarely if ever seen. The Fed­eral Re­serve’s job might seem sim­ple: the econ­omy is clos­ing in on the long­est pe­riod of growth in recorded his­tory, with un­em­ploy­ment at the low­est in nearly 50 years and in­fla­tion right on tar­get at two per­cent.

By those mea­sures the Fed can de­clare vic­tory. Full em­ploy­ment and stable in­fla­tion are the goals that Congress set for the cen­tral bank. But the wild ride on US stock mar­kets in re­cent weeks, and in par­tic­u­lar the past four days, show the chal­lenge for cen­tral bankers in an en­vi­ron­ment where Pres­i­dent Don­ald Trump can change eco­nomic pol­icy and shake busi­ness con­fi­dence with each tweet.

Eco­nomic data have started to flash early warn­ing signs and anx­i­ety among busi­nesses is am­pli­fied by Trump’s use of uncer­tainty as a ne­go­ti­at­ing tool while he pur­sues a con­fronta­tional trade pol­icy, tar­geted at al­lies and ad­ver­saries alike-but in par­tic­u­lar against China. The Fed’s role is a bal­ance be­tween cheer­leader, ther­a­pist and sher­iff for fi­nan­cial mar­kets.

And lately se­nior of­fi­cials, in­clud­ing Fed Chair­man Jerome Pow­ell, have had to change their mes­sag­ing to calm jittery in­vestors: sig­nal­ing it might slow the pace of in­creases in the key lend­ing rate.

The US stock mar­ket took an­other dive on Fri­day, with losses of more than two per­cent, or close to 600 points for the Dow.

Strong econ­omy-but how long?

The crit­i­cal em­ploy­ment re­port on Fri­day gave a mixed mes­sage about the state of the econ­omy. Job gains slowed to 155,000 last month, lower than ex­pected and well below the 209,000 monthly av­er­age of the last 12 months. That slow­down, pos­si­bly re­flect­ing the lin­ger­ing ef­fects of the hur­ri­canes in the prior two months, is in keep­ing with an econ­omy hit­ting its peak.

“Signs of a ma­tur­ing, but still ro­bust la­bor mar­ket,” Greg Daco of Ox­ford Eco­nom­ics said of the re­port, echo­ing the view of other an­a­lysts.

But the data also showed wages con­tin­ued to rise and were 3.1 per­cent higher than a year ear­lier, out­pac­ing in­fla­tion. And the Busi­ness Roundtable’s quar­terly sur­vey re­leased Fri­day showed that while chief ex­ec­u­tives re­mained con­fi­dent about the econ­omy, they cited la­bor as the pri­mary cost pres­sure their com­pa­nies face.

That same sen­ti­ment has been re­flected in the In­sti­tute of Sup­ply Man­age­ment’s sur­veys of the man­u­fac­tur­ing and ser­vices sec­tors, as well as the Fed’s “beige book” na­tional sur­vey, show­ing wide­spread la­bor short­ages and in­creas­ing re­ports of wage and price in­creases in many in­dus­tries as a re­sult. Ris­ing wages al­ways make the Fed sit up and take no­tice since this feeds into in­fla­tion.

Tight la­bor mar­kets have even caused some com­pa­nies to de­lay pro­jects but the pri­mary risk busi­nesses see-in­clud­ing 82 per­cent of those in the Busi­ness Roundtable sur­vey-is tar­iffs.

Trump has im­posed steep tar­iffs on im­ported steel and alu­minum, and on $250 bil­lion in goods from China, rais­ing costs, no­tably in the auto sec­tor, which has seen ma­jor job cut an­nounce­ments, and de­lay­ing ex­pan­sion and in­vest­ment plans.

A Fed pause

The key chal­lenge for the Fed ef­fort to achieve a soft land­ing will be to ad­dress the con­trary forces of ris­ing price pres­sures and a slow­ing econ­omy. Al­though Trump an­nounced a 90-day tar­iff truce with China’s Pres­i­dent Xi Jin­ping, doubts about the time­line and likely pol­icy out­comes have in­creased fears that the US econ­omy could slow and even con­tract in the next two years, send­ing in­vestors scur­ry­ing for cover this week.

Pow­ell has presided over three rate in­creases this year, and a fourth is widely ex­pected in De­cem­ber and the Fed has for months has re­peat­edly said it in­tends to con­tin­ual grad­ual in­creases.

But from one speech to the next in re­cent weeks, Pow­ell changed his tune amid the pes­simistic mar­ket re­ac­tion, chang­ing gears from high­light­ing the strength of the econ­omy and the plan for con­tin­ued rate in­creases, to stress­ing that the fin­ish line is close.

And the most di­rect sign of the cen­tral bank’s in­ten­tions came Thurs­day when The Wall Street Jour­nal re­ported the Fed was “con­sid­er­ing whether to sig­nal a new wait-and­see ap­proach” since “they are be­com­ing less sure how fast they will need to act or how far they will need to go, and they want to as­sess how the econ­omy is hold­ing up un­der moves they have al­ready made.” —AFP

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