Thanksgiving Football Weekend, Winning the Financial Debate
When this year’s holiday weekend discussion turns to the US economy, which it may, you need to be primed correctly.
Whether your relatives want to talk about the job market as casual observers or parse Fed actions like superNerds, we have prepared rebuttals for some of Y 2018’s most common banalities.
When your friend or relative says: I’ve read about the strong economy, but prices seem to climb relentlessly, while paychecks are not keeping up.
You say, let us talk wages.
At long last wages are heading North faster than inflation right now. In fact, price-adjusted median household incomes have finally surpassed Y 1999 levels over the past 2 years after taking a major recession-era hit, based on a Census measure. Such gains may have been a long time coming, but they are reaching virtually all working Americans. Consumers report feeling confident about their household financial futures across income levels, New York Fed survey data shows.
Then the next guy says: “President Donald Trump has shifted America’s economy into high gear.”
His wife chimes in saying: “What are you talking about? His policies are irresponsible.”
You say, Hang on you guys
Growth has moved North, helped by the Trump tax cuts and higher spending caps. There are nascent signs of more capital investment; 1 of the main goals of the Trump tax cuts. Yes, business spending cooled recently, and data this week showed that durable goods orders slumped in October. The fiscal high is expected to start wearing off in Y 2019. One thing is clear as annual budget deficits approach $1-T, they are leaving the country more indebted.
Your pal says: The Fed is getting a little aggressive with these rate hikes don’t you think?.
You say, not so fast
Have you seen the unemployment rate lately? It is at its lowest mark in 50 years, and such a minuscule jobless rate is encouraging employers to raise wages. That is a good thing, but the Fed wants to make sure that the economy does not overheat, stoking excesses and rapid price gains next year. Fed rate increases start to bite after a year or more, so policy makers are slowing now, so that they will not have to slam on the brakes if inflation takes off, but maybe they are getting ahead of themselves, as they often do,
Your next door neighbor says: The Fed threw around a bunch of free money and should have hiked rates sooner.
Your comeback to that crack is: Show me the inflation. It undershot the Fed’s 2% goal for years, and even now, it’s only coming in right around that level on a core basis. Inflation expectations also are a little on the low side. If the Fed had lifted rates aggressively and too early, it might have made it harder for it to nudge prices up. Higher prices may sound bad, but if gains are too slow, the country risks deflation and it’s harder for employers to raise wages.
Now you have more joining in the discussion
A voice from beyond the TV screen, the game is about to start say this booming stock market proves to me the US is on the right track, my 401 (k) is at record highs.
Your say Yep! Stock saw a The Trump Bump, but stocks are not necessarily a great indicator of long-term economic activity. The bond market might offer better evidence of sustainably faster growth. And it is not too optimistic in here. The fixed-income market’s relatively flat yield curve suggests an expectation that today’s solid economy may not be set up to extend the boom.
Then your host says: The federal funds rate is going to rise above the upper limit on its target range, if the Fed’s Jay Powell is not careful.
You answer right away, Powell is a man with a plan. Many economists expect the Fed to make another technical adjustment when officials meet in December to keep the funds rate trading within its target range. It does beg this question, though: Is reserve scarcity driving the change, and if so, does that mean balance sheet runoff will have to stop earlier than planned? Fed officials do not think so, but it is a story to watch in Y 2019 because the Fed is not always right, just ask President Trump.
Your host retorts: Quantitative easing did not work.
Your answer is Ah but it did, and here’s the proof studies have become a genre of economic research unto itself, at the end of the day, it’s hard to prove a counterfactual. What we do know is that the economy recovered, that interest rates were weighted down and that the Fed plans to keep bond-buying in its toolkit for the next recession.
The TV announcer is calling for the Kickoff, end the discussion and enjoy the rest of the day.
Have a terrific weekend.
Making and Keeping America Great!