Just the Facts, Ma'am
JACKSON HOLE, Wyo. -- And today we talk facts.
The sane song of
rings clear among a chorus of tossers. Larry provided us with the following
guidance a little over a month ago.
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. The failure to do so could run the risk of unleashing inflation pressures that would be disruptive to reverse.
gross domestic product
forecasts over the past few years have proven unambiguously sorry.
The Fed predicted1996 growth would come in as little as 2.5% and no bigger than 3%.
Growth came in at 3.9%.
The Fed predicted 1997 growth would come in as little as 2% and no bigger than 2.5%.
Growth came in at 3.8%.
The Fed predicted 1998 growth would come in as little as 1.75% and no bigger than 3%.
Growth came in at 4.3%.
And the Fed recently
predicted that 1999 growth would come in as little as 2% and no bigger than 3.5%.
And by now it ought to be perfectly clear to everyone -- as clear as an azure sky of deepest summer -- that (a) our old
friend the ham sandwich with a scepter is just as deserving of a comfy leather chair at the Fed's fancy marble conference table and (b) betting the over probably ain't a bad idea.
The forecasters who have been dead right about strong economic growth over the past few years reckon GDP will rise between 3.8% and 4.3% again this year. Why? One more time: Expansions do not die of old age. It is a fact that an object will continue to move at constant speed unless it is acted on by an unbalanced force. The economy obeys this
law of motion; the economy does not just up and brake all on its own. And, as has been the case since the Fed quit serving up unbalanced forces in 1995, there still exists no good reason to forecast that it will do precisely that. The forecasters at
Salomon Smith Barney
put it this way:
The slowing in April retail sales could be a hint that the spike in fuel bills is reversing the de facto monetary windfall from oil's earlier collapse, perhaps assisting Fed hopes for a timely moderation in spending. But such hopes for a safe re-entry have been dashed countless times in the past three years of accommodative policy. ... One lesson of recent years has been that no significant demand slowdown will unfold without a measurable tightening of financial conditions.
And even the dimmest of the dim might finally have begun to accept this. Your narrator recently
brought to your attention two of the most ridiculous 1999 economic forecasts out there.
The growth (and inflation) numbers from one of them -- the one borne partly of that particularly big
brain -- were jacked up by a full percentage point just seven days later.
Labor markets are tightening further and inflation is not moving lower.
The unemployment rate in this country fell to 4.5% from 7.5% between 1992 and 1998, and the forecasters who got that right reckon it will fall again this year (note that it is already on track to do so; it averaged 4.3% during the first four months of the year). They see it dropping to 3.9% during the fourth quarter and averaging 4.1% for all of 1999, which would mark a four-tenths improvement on the 1998 rate (precisely the average improvement we have seen during each of the last three years). Why? Because, very simply, that's what unemployment rates do when the economy keeps growing.
Meanwhile, the fact that the
(excluding food and energy) inflation picture is not now showing improvement has been documented in this column several times in recent weeks. The overall inflation picture, mind you, owing to an overdue bounce in energy prices following a 3.4% decrease in 1997 and an 8.8% plunge in 1998, is just plain deteriorating. But the Fed wouldn't think seriously about tightening if underlying price trends were improving, and so here we restrict ourselves to core price pressure. (And keep in mind that the core price measures have to post
smaller and smaller
increases; steady performances are not enough. Why? Because if it's really New-Era productivity and technology that's been driving them down over the past few years, then there is no reason at all why they shouldn't keep right on decelerating.) Consider the most recent facts to come to light.
Fact Three (a).
The gross domestic product (or GDP) report contains three core price measures (all three are shown in Appendix Table A in the release).
The GDP price index less food and energy recently posted its biggest quarterly increase (1.3%) since the second quarter of 1997. Note that this index rose 1.1% last year.
The gross domestic purchases price index less food and energy -- this is the broadest possible measure of prices paid by U.S. residents -- recently posted back-to-back increases in excess of 1% for the first time since the first half of 1997. Note that this index rose 0.9% last year.
The personal consumption expenditures price index less food and energy has shown no improvement whatsoever since the third quarter of 1997. It has posted rock-steady increases ranging from 1% to 1.3% for seven straight quarters.
Fact Three (b).
Center for International Business Cycle Research
puts out something called the
Leading Inflation Index
. It was falling at a 3.3% annual rate back in February 1998; it was rising at a 3.7% annual rate as of last month. This index increased more between October of last year and April of this year than it has during any six-month period since the latter half of 1994 (and note that core consumer prices ended up accelerating between 1994 and 1995). Don't waste time fretting about whether or not the numbers themselves are accurate. Focus instead on the fact that this thing has clearly turned a corner; focus on the trend. It's up.
Fact Three (c).
consumer price index
deteriorating as of April.
Do note this lovely New-Era spin: Now that the first core CPI data point of the second quarter printed big, The Tool and Tool Juniors are out in force swearing that it merely represents payback for what they now claim was an unusually tame first quarter. One television New Era moron went so far as to describe the April number as "worthless." Funny, isn't it? That we heard nothing about funky seasonality from these people while the January-February-March core numbers were printing at a below-trend 0.1%? And back then the numbers were hardly billed as worthless; indeed, they were trotted out as yet more proof that the New Era is real.
As to the curiouser and curiouser gold-bug argument that a sharp and sustained (going on eight months now) rise in interest rates and early evidence of price pressure are nothing more than "head-fakes" because they're not confirmed by an increase in gold prices?
Your narrator has not one doubt that any New Era type worth his salt has at the ready an arsenal of charts "proving" that the price of gold has not once in its history failed to predict every twist and turn in both the broad price measures and interest rates. And you are free to subscribe to such analysis if you like.
But you should know two important things about it.
The first is that acting on it would have cost you a boatload of dough while the bond contract plunged 16 points (and while yields soared to 5.9% from 4.7%) between October and now.
The second is that it is terribly tough to view this gold-cling thing as anything but grasping.
For, as the New Era types remind us over and over, we now live in one cool brave new world. The monetary aggregates no longer have anything relevant to say about nominal growth; concepts like
have been exposed as entirely useless and not only does the
not work now, it never worked to begin with; a marked and permanent increase in productivity means the economy can grow without consequence; the Internet means that businesses are henceforth relegated to accepting whatever prices, no matter how low, consumers decide they want to pay; the law of supply and demand is forever dead.
Why is it, then, that in a high-tech world operating under a set of completely new rules, that the cost of an ounce of a shiny medieval metal is still considered by many to be the single best indicator of the direction of broad price pressure and monetary policy?
Say we scooped up half of all the gold in the world, melted it down, and poured it into the
. It's gone for good. Never to be seen again.
That would (presumably) send gold prices soaring.
Now ask yourself this. Would the right Fed reaction be to come in and start sending the funds rate skyward at once? To stem the sharp increase in the overall price level that gold says is sure to follow? Is that the policy New Era types would prescribe if the price of gold suddenly doubled?
Get real already.
A gross exaggeration? You bet. But you get the point.
What the hell kind of a policy guide is that?
And does it sound like one you want to be betting on?
The members of the
are wise to announce a bias to tighten tomorrow, but do not lose your focus if they don't. The facts point to the conclusion that the next move in the
, whenever it comes, will be up, not down.
Even if the price of yellow drops another 30 bones, and even if the Fed is too much a slave to shares to come right out and say so.
were wearing some terribly cool old-style uniforms last night. Too bad they have to play in a stupid dome.
Anyone doing it on Ostertag.