via notayesmanseconomics:
The economic theme of 2024 so far has been the expectation of and then the failure to appear of interest-rate cuts in the United States. This has a particular feature in that one member of the US Federal Reserve Neel Kashkari has apparently been on quite a journey and let us start with where he thinks we are now.
So consumption has held up remarkably well over this tightening cycle. GDP has held up remarkably well. The labour market, the unemployment rate has ticked up to 3.9 per cent. That’s still a very low unemployment rate by US history standards. The housing market has remained remarkably resilient. So if I look at real economic activity, real economic activity in the US looks quite robust and more robust than very tight monetary policy would have suggested.
So the US economy is strong and the impact of higher interest-rates appears rather muted. Which leads to this question from the Financial Times.
So that sort of suggests that monetary policy at a rate of five and a quarter to five and a half per cent isn’t very tight in your view.
To which he replies.
It’s a question that I have. It appears like it may not be having as much downward pressure on demand than I would have otherwise thought.
At the moment he is not going quite as far as suggesting another increase in interest-rates.
I think right now my best guess is we would leave it here for an extended period of time until we get a lot more data to convince us one way or the other.
Neel’s Theoretical Crisis
This is two-fold and we can start with his modelling failures when inflation soared.
And we had long-run inflation expectations that appeared to be well anchored.
He preferred theoretical models over reality and whilst he claims to be learning if we bring things up to date he says this.
Is underlying inflation really on its way down?
So another theoretical imposition as he appears unable to realise they have utterly failed. Indeed he now seems to be obsessing on something that is even more unreliable.
And the question that I’m raising publicly and to my colleagues is perhaps some of the dynamics of the reopening economy have elevated what we call R-star, at least in the short run, the neutral interest rate. Maybe that is elevated for some reason in the short run.
At this point we see that whilst it is good he realises he has made mistakes his answer is even more of the thing that has gone wrong! The use of R-star is perhaps the most extreme theoretical imposition of all as no-one knows where it is. Indeed this whole section of the interview is an admittal of that very fact. For newer readers it was believed by the US Federal Reserve an other central bankers to be around 2.5% to 3% before they made any effort to get there. But now Neel is suggesting it is above the present US interest-rate of 5.25% to 5.5%.
So he continues to prefer theory over reality no matter how silly the theory looks. Indeed he is such an obsessive that he actually seems to believe that central banks still have credibility.
And I think that that anchoring of inflation expectations has been a foundation of a lot of the economic prosperity that America has enjoyed in the ensuing 40 years. I would be very cautious about putting that at risk.
It is like an episode of The Twilight Zone or The Outer Limits. This leads to a logical conclusion which is not a compliment for Mr. Kashkari.
You, I suppose, were dove, sort of super dove, very concerned that we were underestimating the potential of the US economy to grow. Policy, you know, was a bit too tight. That was the problem then. And now, you seem to have moved towards this actually relatively hawkish position, where now you’re more concerned about inflation being more of a problem.
Whatever extreme we are at Mr.Kashlari wants more of it.
More, more, moreHow do you like it? How do you like it?More, more, moreHow do you like it? How do you like it? ( Andrea True Connection)
Is the US economy finally slowing?
There have been some suggestions of this. Whilst it was only minor US economy growth in the first quarter was revised down last week.
Real gross domestic product (GDP) increased at an annual rate of 1.3 percent in the first quarter of 2024 , according to the “second” estimate released by the Bureau of Economic Analysis. In the fourth quarter of 2023, real GDP increased 3.4 percent.
So we now have a slightly higher reduction from the end of last year. Plus this quarter is being downgraded by the Atlanta Federal Reserve.
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2024 is 2.7 percent on May 31, down from 3.5 percent on May 24.
The reading was above 4% only a month or so ago. In terms of the detail we see this.
a decrease in the nowcast of second-quarter real personal consumption expenditures growth from 3.4 percent to 2.6 percent was partly offset by an increase in the nowcast of second-quarter real gross private domestic investment growth from 5.1 percent to 6.3 percent, while the nowcast of the contribution of the change in real net exports to second-quarter real GDP growth decreased from -0.06 percentage points to -0.60 percentage points.
If we start with the income and consumption figures the Bureau of Labor Statistics had released this.
Real DPI decreased 0.1 percent in April and real PCE decreased 0.1 percent; goods decreased 0.4 percent and services increased 0.1 percent
So actual monthly falls in real terms This reinforced the theme suggested in the middle of May when the Census Bureau released the retail sales numbers.
Advance estimates of U.S. retail and food services sales for April 2024, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $705.2 billion, virtually unchanged (±0.4 percent)* from the previous month
So again a real terms decline. Returning to the GDP Now release there was also a significant fall in US net exports. All of this was offset a little by the rise in investment.
Comment
There would be a particular irony if the US economy slowed just as Minneapolis Fed President Neel Kashkari is worried about an acceleration of the economy. The issues are always complex as for example it would mean that the lags in the impact of interest-rate rises have got longer. There is logic in that via the number of long-term fixes in the mortgage market but of course central bankers prefer theory to logic.
There is no real addressing of his own role in the surge in inflation.
You also had a lot of stimulus — fiscal stimulus and monetary stimulus — flooding those same goods markets.
One solitary sentence but with no real addressing of the fact he wanted more monetary stimulus which would have led to even higher inflation. Plus he lets the expansionary fiscal policy ( which he helped finance) slide by too. Moving on he has quite some chutzpah claiming this.
but fortunately the Federal Reserve acted aggressively and has reinforced the point that we are dead serious about getting inflation back down.
And indeed this.
because I don’t want to risk damaging the long-run credibility of the Federal Reserve,