I’ve written very little about the Fed in recent weeks, in part because there’s this other thing going on, but more because I don’t have much to say that isn’t being amply said elsewhere. But it’s not even 9am yet and I’ve already bumped into a number of Fed-related arguments that seem worth weighing in on.
–First, where’s the inflation, either actual or expected? Last year, core PCE inflation, year-over-year, rose either 1.3, 1.4, or 1.5 percent in every month. This year, it has gone up either 1.6 or 1.7 percent every month. So yes, if you want to argue that price growth in the Fed’s preferred gauge has accelerated, I agree. But that’s of course what you’d expect as the economy improved and more resources were utilized. Even with a relatively flat Phillip’s curve, we expect some firming of prices. Increasing inflation is not out-of-control, un-anchored, or spiraling inflation.
–Magnitudes matter! Those number I just cited are still persistent misses from the Fed’s 2 percent target, and just as importantly, such a gradual, low-variance trend confirms that inflation expectations remain well-anchored, as you can see here. And please, 2 percent’s an average, not a ceiling, right? Right? Anyone? Bueller…?
–There’s got to be more than free-flowing anxiety behind this claim of spiraling price growth waiting to pounce. I’ve seen no such evidence.
–Some point to wage acceleration. Different wage series show different trends, but if you mash them together, as is my wont, you find that the tightening job market has, in fact, given workers a bit more bargaining clout and nominal wage growth basically moved up from 2 to 2.5 percent. That’s good news! And again, it’s exactly what you’d predict as we close in on full employment.
–Moreover, there’s no evidence that faster wage growth has been inflationary. See point one above, as well as this next point:
–Double moreover, here’s an important source of non-inflationary wage growth: a rebalancing of the “factor shares” of national income. See the figure below on labor share (the compensation share of national income) from a recent CEA post. You’ll note the recent tick up in labor share, but it still remains well below recent peaks. As workers’ bargaining clout improves, that shift should continue. In fact, we’re already hearing some whining about wages squeezing profits–I’d argue there’s lots of losses to make up in that space, but the point here is that wage gains from that source are not a source of price pressure.
–Finally, Brad DeLong asks a fair question: “Why, if you want to tighten monetary policy, are you doing so first by raising interest rates rather than by shrinking the balance sheet?” The Fed’s balance sheet hasn’t grown of late (figure below) but it’s still highly elevated and surely a weapon against an unforeseen inflation shock. I can’t speak to the relative impact magnitudes of raising rates vs. unwinding the balance sheet, but my prior is that operationally, the latter would be constitute less of a brake-tap than the former.
I’m not going to plotz if the Fed raises 25 basis points in December. Part of this is hawk management by Chair Yellen. But I still consider the Fed to be pretty much the one rational, data-driven institution we have left. Yet some of this inflationary phantom menace stuff makes me worry that some folks over there could catch the Beltway fever–you know, the one where your vision Trumps the facts.