The Fed Is Flying Blind

Posted: May 15, 2018 11:16 AM
The Fed Is Flying Blind

For the vast majority of working Americans, Federal Reserve interest rate hikes seem an overhyped annoyance.   What does the cost of money mean to me when working for a living?  The truth is that interest rates (and the cost of money) will drive any price you pay based on what you borrowed.  That means mortgage payments, credit cards; in fact every single payment you make based on credit borrowing will be higher.  Given Treasuries' propensity to depreciate our currency as well as oil shocks gives all working Americans pause to reflect on our spending trends and overall consumption habits.

The two questions we must contend with is how to anticipate the Fed’s shrinking of its balance sheet and its mandate for unemployment.

Hiking interest rates is really about policy normalization.  What all the professional media pundits mask is the desperate attempt on behalf of Fed officials to return to policy normalization.  Why?  Because the Fed has lost its credibility and no longer has any real impact of directing our fractured economy.  The rush is to hike interest rates and pay down its trillion-dollar portfolio.   Having a broken transmission mechanism is a secondary problem that will work itself out over time, but the rush to dump its high portfolio remains paramount.

The Fed’s mandate to control employment is exhausted.  We remain in a historically low, subpar economic recovery regarding employment.   How is this the case?  We need to understand that the decline in unemployment is a consequence of the length of our recovery not its strength in distinct sectors.  The fall in unemployment is affected by the permanent decline in the labor force participation rate.  The decline in male labor force participation is well know, what isn’t is the flattening rate for women.  According to the Bureau of Labor Statistics, nearly 7 million men have dropped out of the US work force over the last 50 years for those aged 25-54.  Consequently, the measured unemployment rate continues to fall because men no longer seek employment.

There are both policy and social reasons for this decline.  Both economic entitlements and underlying social ideas about male work limit the appeal to work.

The Fed continues to fly blind because its indices are misleading.  Neither the unemployment rate, inflation targets, or other indicators of monetary policy are reliable to gauge our digital based economy.  In a sentence, slow GDP growth reflects supply constraints in labor markets that remain sourced fiscally.  This isn’t a monetary problem that the central bank can fix.

Our post 2008 crisis has delivered the Federal Reserve into uncharted territory.  It must perform rate hikes to end its positioning in credit allocation, but this unwinding does not position the Fed to command the heights of our economy anymore.