A Benjamin Cole post
Speaking in Beijing a few days ago, Chicago Federal Reserve Bank President Charles Evans said economic stagnation is the new normal and so he sees slow inflation, interest rates and growth for far as the eye can see. Ergo, there is nothing for the Fed to do.
Eric Rosengren, Boston Fed President, reviewed the same outlook, but added that rate hikes will be needed soon, as the U.S. economy, particularly commercial real estate, could “overheat.”
Overheat?
Again, here is a telling graph:
For Q1 2016, the index of hours worked nationally in the United States private sector was 112.3. It was 110.2 in Q2 2007, and 109.2 in Q2 2000. That is 16 years of essentially no employment growth in the United States.
This is overheating?
And look at the 1990s—strong employment growth, and sustained. Yet inflation was moderate throughout the decade.
Presently, the PCE core is reading 1.6% YOY. As Marcus Nunes has pointed out repeatedly on these pages, nominal GDP growth has been falling in recent years.
Conclusion
There remains a premise in central banker and monetary circles that fiat-money central banks have been “easy” (perhaps for decades) or “accommodative,” and have done all they can do, sometimes wreaking destruction in their path.
So now it is time for central bankers to victoriously declare defeat.
Central bankers contend that by being so easy for so long, they have driven the developed world into deflation, or close to it.
So now, raising rates makes sense.