Steve Moore Deflation Claim vs. Gold Reality

Posted: Apr 25, 2019 11:05 AM
Steve Moore Deflation Claim vs. Gold Reality

Source: AP Photo/Pablo Martinez Mosivais

(Gold price; source: FRED)

Steve Moore argued recently in the Wall Street Journal that the Fed rate hikes have been deflationary.

He has used this repeatedly to argue for monetary easing (cutting rates). Here's an example.

The president, who has been criticizing the Fed for being too tight, read that column and decided to offer Moore an appointment to the Fed Board of Governors. Of course, every president wants easy money. Who wouldn't want a tailwind for financial markets and the alleged benefits of a weaker dollar for trade deficits and economic stimulus at home? Who wouldn't want that? Believers in the soundness of money wouldn't want that, and supply-side economics is supposed to be built on low taxes and sound money as fundamental principles.

The Journal went on to endorse Mr. Moore for the post, arguing that,

"Mr. Moore has certainly been proven right in his warning last autumn that the Fed was tightening policy too fast. Everyone at the Fed now seems to agree with him."

One can forgive the journal for excesses of personal loyalty in promoting a colleague, but let's get the facts right. Not one member of the Fed board has said that they tightened policy too fast. The most recent Fed minutes released showed a debate about whether to raise more this year or wait till later to hike. No one argued that the past hikes were too much. No one called for a rate cut. So, not only is it not true that 'everyone at the Fed agrees with him', the record shows that everyone at the Fed disagrees with him. The Fed consensus was not 'we went too far' but instead 'we went far enough for now'.

WSJ reporter (not editorial board) Greg Ip has a better grasp on what's wrong with the Moore appointment. Even if he's right about falling copper prices showing deflation (rather than flagging growth, which is what copper is known for), he's applying the rule in a politicized fashion. He was against easy money when copper was falling under Obama, but for easy money when copper is falling under Trump.

What's the point of looking at pundits like Steve as thought leaders when they're really more thought followers, following political winds blowing from the President's Twitter account?

Plus, there's the data, which in no way support the deflation claim. I like Steve Moore, and I like the Wall Street Journal. In the great scheme of things, they are on the side of the angels. But I like the truth more. The truth is that there is no deflation. The markets know it too, which is why I opened this article with gold prices.

Moore's argument that the Fed is deflationary bumps up against reality when looked at over the longer run as well:

From the time of the beginning of the Fed's current tightening cycle to now, the price of gold has gone up roughly $220per ounce -- that's 21%. Some deflation.

Everyone likes to talk about principles… until principles conflict with political loyalties, collegiality, tribe, and the lure of power. That's the point of rules, which are based on principles. Principles don't change -- that's what they're for.