The Fed Takes a Second Look at Its Good-News Story on American Jobs
It began as an inquest into what went wrong. Now the Federal Reserve’s policy rethink may be widening to include the part the central bank thought it had gotten right. Inflation keeps falling short of the Fed’s target, and that was the trigger for what’s supposed to be a months-long review of strategy. Now, policy makers are being drawn into a conversation about the full-employment side of their mandate too. The record there looks impressive, with jobless rates near a half-century low. But Fed Vice Chairman Richard Clarida is hinting at another side of the story, one which may bolster the case against further monetary tightening. At a Minneapolis Fed conference on April 9, panelists were discussing the connection between monetary policy and the portion of national income that goes to wage-earners — the so-called labor share. A measure Clarida devised before joining the central bank last year indicates the labor share has yet to rebound after spending much of the current expansion at the lowest levels in many decades. “I’ve been thinking for several years about this,’’ he commented from the audience during the question-and-answer portion of the presentation. “I hadn’t seen a lot of macro work. So I’m really delighted that folks are thinking about it now.’’ In recent expansions, when labor markets tightened and wage growth accelerated, the outcome wasn’t higher inflation. Workers managed to claw back at least some of their lost slice of the pie, but businesses didn’t pass the higher payroll costs on to consumers. Clarida asked a panelist if his model addressed this. The answer was no. For decades, the Fed’s interest-rate policy has been guided by the belief that pushing unemployment below its so-called “natural’’ level is inflationary. The theory was worked out by conservative economist Milton Friedman in the 1960s, and gained widespread acceptance in the high-inflation decade that followed. Acting on that logic, Fed officials tightened policy from 2015 to 2018, as unemployment fell toward and then below their estimates of the natural rate. But inflation didn’t pick up as the models predicted it would.’
Bank of Canada’s Poloz Reinforces Perception Rates Are on Hold
Bank of Canada Governor Stephen Poloz indicated he’s all but abandoned any bias for higher interest rates, saying officials are simply focused on keeping policy aligned with current economic conditions. Asked at a press briefing Saturday in Washington whether he’s done with hiking, Poloz said: “That’s a very data dependent question.” He also dismissed the idea the central bank has any specific target for borrowing costs, even though policy makers estimate interest rates would probably need to be higher were the economy not facing headwinds. “What matters is what forces are acting in the economy,” and what’s the level of interest rates that will bring the economy into balance, said Poloz, who was attending meetings of the International Monetary Fund. “That number is going to change every time something hits the economy, whether it’s a positive thing or a negative thing.” The comments are consistent with the central bank’s recent efforts to temper previous statements about the need to raise rates. They also bring it more into line with the dovish tilt in global monetary policy. Over the past six weeks, Poloz and his officials have highlighted the need for continued stimulus amid a slowing economy and downplayed the notion they have a precise understanding of where rates would need to settle even if headwinds dissipate. Estimates of how high rates will eventually need to go are simply theoretical, and the actual “neutral rate” is an unknown, said Poloz. Regardless, headwinds exist and require the policy rate to remain stimulative, he said. At the last rate decision on March 6, “we said pretty clearly, conditions warrant a rate of interest below neutral,” Poloz said. “So it’s obvious that we’re still working on some headwinds or things that are keeping the economy getting all the way home. That’s as far as I can go at this stage.” A good indication of how the economy is doing comes later Monday, when the central bank releases the spring edition of its Business Outlook Survey and Senior Loan Officer Survey, the institution’s last major publications before the April 24 rate announcement and quarterly Monetary Policy Report. Also this week, Statistics Canada releases data on trade, inflation and retail sales.
China to Maintain Prudent Monetary Policy, PBOC’s Chen Says
China will maintain a prudent monetary policy stance this year and keep the yuan in line with fundamentals as it uses fiscal tools to spur growth, according to central bank Deputy Governor Chen Yulu . The Chinese economy has been “generally stable,” Chen said a statement to the International Monetary and Financial Committee, which was posted on the IMF’s website. Authorities will further open up the financial sector and level the playing field between local and foreign-funded institutions to strengthen the industry, he said. “Prudent monetary policy will be neutral in general,” the deputy governor said. “China will pursue a proactive fiscal policy with greater intensity and enhance its performance, focusing on cutting taxes and fees on a larger scale.” Policy makers in Beijing have been trying to stimulate growth without causing a debt blowout as trade tensions complicate the outlook for an economy that’s already slowed moderately because of a domestic financial cleanup. The Wall Street Journal reported on Friday that the U.S.-China trade deal may include penalties if the latter manipulates its currency to boost exports. China will continue to “improve the exchange rate mechanism and keep the RMB exchange rate in line with fundamentals at an adaptive equilibrium level,” Chen said. The potential for foreign portfolio investment inflows is growing, the central bank official said, pointing to the inclusion of yuan-denominated assets into global indexes as a reason. Such inflows hit a record $120 billion last year, he said. “The stock market, which has seen a slack in the past few years, is showing signs of bottoming out and recovering,” he said. Chen said that Chinese and foreign-funded financial institutions will be treated “equally in a way that is more transparent and consistent” with best international practices to strengthen the vitality of the financial sector.
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