This article was published by The McAlvany Intelligence Advisor on Friday, March 23, 2018: 

English: Short-Run Phillips Curve before and a...

Short-Run Phillips Curve before and after Expansionary Policy

In politics, according to FDR, there are no coincidences. He famously said that “in politics if something happens you can be sure it was planned that way.” The announcement by Trump that he has filed for reelection in 2020 and the pronouncement by the following it may just be one of those “planned” coincidences.

The pronouncement from Jerome Powell, the new head of the Fed, was, on the surface, comforting:

The economic outlook has strengthened in recent months. Several factors are supporting this outlook: fiscal policy [i.e., Trump’s tax cuts to individuals and corporations] has become more stimulative, ongoing job gains are boosting incomes and , foreign growth is on a firm trajectory, and overall financial conditions remain accommodative.

But the Open Market Committee unanimously decided to raise interests for the sixth time since 2015 anyway. It’s the Phillips Curve that is guiding these “experts” into the move, along with another seven rate hikes between now and 2020. That will be almost certain to send the country’s into just in time for Trump’s reelection campaign to begin. Presidents historically have a problem getting reelected if they can be blamed for the the voters are experiencing.

The Phillips Curve claims that there is an inverse relationship between rates and wages: the lower the higher are the wages demanded. And, according to the sages on the OMC, that portends “” that must be snuffed out, in advance if possible.

This writer has decried the so-called linkage between wage increases and price increases. Inflation is the result of an increase in the supply of money, not in any increase in wages demanded by employees and paid by employers. And Mr. Powell certainly knows that the Fed has been shrinking the since August 2014, not increasing it.

This leads one to conclude that he is putting in plans now to force the economy about which he celebrated in his message into a recession just in time for Mr. Trump’s redux.

Powell dresses up his efforts as trying to find the so-called “middle ground”: between waiting too long and not starting soon enough:

We’re trying to take the middle ground, and the [Open Market] committee continues to believe that the middle ground consists of further gradual increases in the federal-funds rate.

The Fed funds rate is the interest rate charge each other for overnight loans. With the new hike in place that rate will be between 1.5 percent and 1.75 percent. But the next seven hikes scheduled by the Fed between now and 2020 will bring that rate to 3.5 percent, more than enough to slow bank lending, take the shine off the in favor of bonds, and tip the economy into recession.

The Phillips Curve has been widely dismissed as irrelevant and useless as a planning tool, especially in the long run. In a placid economy (i.e., without Fed interventions), wages will rise when the supply of labor drops. That has nothing to do whatsoever with the general price level. Evidence for a strong U.S. economy is reflected in the number of new created over the past few years and the consequent and predictable drop in the unemployment rate.

The best estimates are that the U.S. economy is growing nicely, at around 2.7 percent annually. Optimists are hoping for three percent or better, but reality stands in the way: a diminishing pool of workers. In 2015 the economy added 2.71 million jobs. In 2016 it added 2.5 million jobs. In 2017 it added 2.28 million jobs. Along the way, the unemployment rate dropped from 5.7 percent to 4.1 percent. Barring some miracle, unemployment will – as Powell correctly anticipates – continue to drop, perhaps to levels not seen since the 1960s (around 3.6 percent).

Also predictably, wage growth is increasing, with the latest from the Labor Department showing 2.5 percent gains year-over-year, keeping wage earners ahead of price increases.

So why would he and the worthies populating the FOMC decide that now is the time to start raising interest rates?

Powell is no economist, but he has all of the credentials to place him squarely in the middle of the Swamp: a BA from Princeton, a JD from Georgetown, stints with Dillon, Read & Co., undersecretary of the Treasury under George H.W. Bush, a visiting scholar at the ’s Bipartisan Policy Center, and a nomination to the Federal Reserve Board by Obama.

Why should anyone be surprised? Every other establishment agency connected with the Swamp is anti-Trump. What not the Fed?


Sources:

The Wall Street Journal: Fed’s Mission Improbable: Lift Unemployment—but Avoid Recession

The Wall Street Journal: Fed Raises Rates and Signals Faster Pace in Coming Years

MarketWatch: Opinion: The Federal Reserve is making a huge policy mistake

MarketWatch: Fed raises interest rates, but it’s sticking to cautious strategy for 2018

Background on Jerome Powell

What is the Phillips Curve?

St. Louis Fed: adjusted monetary base from 1984 to present

What is the Federal Funds rate?

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