June 30, 2017 Patrick Oliver-Kelley


Reducing unemployment without sparking inflation is the Holy Grail of the Fed. Mid-June the Fed raised rates by a quarter point (range now 1-1.25%). With an inflation target of 2%. But unemployment is below the “Natural” rate and seems to be permanent at 4.3%. It is possible that inflation will take off when unemployment gets too low, such as happened in the late 1960s? With Trump promising tax cuts and his being able to replace Ms. Yellen early next year, history may yet repeat itself. All this calls into question the ability of the Fed to hit its inflation target.

But the Fed has an unforgiving pessimism about American productivity. If this bleak view is wrong, perhaps the Fed itself is part of the blame for slow growth. Productivity growth is cyclical: it depends on whether the economy is booming or busting. Economies have growth speed limits, determined by changes in population, innovation, and productivity. So long as inflation remains low and stable, it is possible that productivity boosting steps are still left on the table. When productivity rose during recessions, the US began to suffer a rash of jobless recoveries. This is because firms began responding to recessions by eliminating routine jobs through reorganization, outsourcing, and automation. The way to know if America can manage a repeat performance is to test the economy’s limits. Raising our 2% target would offer a chance for such an experiment.

Meanwhile, Trump seems to be bent on marginalizing The United States. The world will now turn to China for leadership. US leadership in the Singapore Shangri-La Dialogue exemplified America’s commitment to keeping the peace in Asia especially in the South China Sea, that leadership has now gone the way of the Dodo- Trump is allowing China to turn it into a Chinese Lake. The perception is heightened that His America First rhetoric except perhaps for North Korea’s nuclear threat, is at the expense of the rest of the world, wrecking the world order America itself is responsible for creating. Even a few other smaller Asian nations have proposed joining China (SCO) in its own patrols and that they join in joint navy patrols. Trump took us out of the Paris Climate accord, China’s Belt and road infrastructure program is a gilded instrument of globalization of a new Chinese order. China joined the Davos meeting presenting itself as a champion of globalism and open markets. China is on the move, even if it is reluctant to push hard on the outer boundaries and seems less keen to take on leadership responsibilities. It is more concerned with domestic perceptions. That Trump is allowing the Beacon of America to dim, seems indisputable.


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