Go Ask Alice
JACKSON HOLE, Wyo. -- A week ago,
told us in no uncertain terms what would lead him to raise the
If inflation does not move lower, while growth remains above trend and labor markets tighten further, it would, in my view, be appropriate to relink real federal funds rate movements back to changes in labor utilization rates.
It's terribly important to understand precisely what this sentence means.
If inflation does not move lower ...
This means that the core (excluding food and energy) price measures have to post smaller and smaller increases in order to prevent Meyer from tightening. Flattish increases just aren't going to cut it. Why? Because if the New Era is for real -- if productivity really is booming and if tame recent price increases really owe much more to New Era technology than they do to temporary and favorable supply shocks -- then the price measures ought to go right on posting smaller and smaller increases, just like they've been doing over the past few years. If the New Era is for real, then there is no reason at all why the core price measures shouldn't continue to decelerate.
While growth remains above trend ...
Trend growth means growth no higher than 3%. (Keep in mind that growth averaged 3.8% between 1996 and 1998; 2.7% between 1992 and 1995; and 4.3% between 1950 and 1969.)
And labor markets tighten further ...
This refers simply to a declining unemployment rate.
So, to sum, above-trend growth alongside further declines in the jobless rate will prompt Meyer to hike the funds rate if the core price measures do not continue to show tamer and tamer increases.
And that, in a nutshell, is really all you need to know about Fed policy. It perfectly explains the past (above-trend growth alongside a lower unemployment rate has not prompted tightening because the price measures are still showing tamer increases), and it tells us precisely what to watch in the future.
Some of you will now doubtless be tempted to write me and argue that it doesn't really matter what Meyer thinks or says because he is always hawkish (and his views don't represent the consensus) and especially because
is the guy who sets policy. In the absence of candid comments from G. Love, you will say, we ought to be paying more attention to Fed Vice Chair
than to Meyer; it's plain as day right there in the
that her views are closer to G's. She allows fully for the New Era. She believes.
Fair enough. That's fine.
But do keep this in mind.
You know what
responds privately when someone -- underling, private money type, whatever -- claims to him that markets are efficient?
I made a billion dollars in the markets. Don't tell me they're efficient.
And in case the parallel isn't clear here, let me lay it out for you.
Meyer thinks more about the economy over a bowl of
than Rivlin has thought about it over the past three years.
And keep in mind that the fact that he was formerly one of the top private-sector forecasters in the country is what made him so attractive to the Fed.
So, if you really think Alan puts more stock in Alice than in Larry, kindly send me some of whatever it is you're smoking.
I am more than happy to pay the postage.
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