Robert Eisenbeis isCumberland Advisors' vice chairman and chief monetary economist. Prior tojoining Cumberland, he was executive vice president and director of research atthe Federal Reserve Bank of Atlanta. He is a member of the U.S. Shadow FinancialRegulatory Committee and the Financial Economist Roundtable. The views andopinions expressed in this piece represent only those of the author and are notnecessarily those of S&P Global Market Intelligence.
As we expected here at Cumberland Advisors, the FOMC chosenot to raise rates at its September meeting but strongly suggested, based onrhetoric and its dot forecast chart, that it was open to one policy move this year.However, the case made in the committee's statement and by Chair Janet Yellenat her press conference was represented as being stronger than an unbiasedobserver could justify by the available data.
As expected, someone asked at the press conference whetherthe November meeting was a "live" meeting or not. Predictably, ChairYellen repeated the mantra that all meetings are live meetings. Butrealistically, the November meeting falls just before the election, no newforecasts will be prepared, and no press conference is currently scheduled, soit would take a surprising turn of the incoming data to trigger a policy moveat that meeting. At that meeting, the committee will have the first reading onthird-quarter GDP, one more jobs report, and two readings on PCE inflation. Sofar, the incoming numbers on third-quarter GDP suggest another quarter ofsluggish or moderate growth. Hence, we aren't likely to see a move untilDecember.
What did the committee say on Wednesday besides projectingthe view that it was close to making a decision to raise rates again? The firstdata point the committee statement focused on was the labor market. While theunemployment rate has remained steady, Chair Yellen emphasized that more peoplehave entered the job market and the labor market has continued to strengthen.Though she did acknowledge that growth thus far in 2016 has been less robustthan in 2015, her case is not as strong as she would like to make it appear.Current job market performance, relative to past history, is in fact dismal.Job growth may be enough, as Chair Yellen argued, to absorb new entrants intothe market, but certainly not enough to also provide jobs for those withpart-time jobs who want full-time work. By comparison, we estimate that iftoday's economy created the same number of jobs per dollar of GDP that it didbetween 1960 and 1970, for example, job growth today would be 4x what it is.Similarly, the number would be twice as large if the job creation rate todaywere what it was in 1983-2006.
Chair Yellen also stated that economic growth had picked upfrom the "modest" pace of the first half of the year. Remember thatthe last three quarters saw GDP growth that never exceeded 1.1%; and whileconsumer spending was strong in July, subsequent data suggest some moderationmay be afoot. Household income did improve according to the latest datarelease, but information from the Fed's own Beige Book suggests that growth isstill not robust. Furthermore, business investment, the engine of job growth,has stagnated. Additionally, the Chicago Fed's national business index and itsfour key components all declined in August; information that had to be availableat the FOMC's meeting. This performance is reflected in the significantmarkdown in the committee's Summary of Economic Projections (SEP) for the secondhalf of the year as compared with its June forecast. Finally, the committeenoted that inflation is still running below target, a shortfall again partiallyrationalized away as being a transitory result of the lasting decline in energyprices. But this, too, is a stretch, since energy prices have remainedrelatively flat for the past three months.
Looking forward, the committee's SEP projections appearcontradictory. For example, both in 2015 and this year, projected GDP growthhas been continually marked down for both 2016 and 2017. Fourth-quarter growthimplied by the forecast is not much above 2%. This pattern, combined with alargely unchanged unemployment situation and an inflation forecast that hoversbelow target through 2019, makes it hard to rationalize the committee's statedview that inflation will be pushed back toward its target in a meaningful way.In the forecasts, aggregate demand is not sufficient to push prices upsignificantly. For demand to hold, there must be a resurgence in thecommittee's real-side Phillips curve view that increases in wages, when and ifthey come, will drive up prices. That model has performed poorly over the pastseveral years; in fact, a simple regression relating inflation to theunemployment rate since 2010 even has the wrong sign.
So, while the committee is increasingly concerned about theneed to restore policy to a more normal stance, it is struggling to understandwhat the neutral interest rate is or should be. This is compounded by the factthat that rate, like the natural rate of unemployment, is not observable. Thatstruggle has been apparent in the public statements by several Reserve Bankpresidents and board members. It was heightened by the three dissents atWednesday's meeting. Presidents Loretta Mester and Eric Rosengren have nowjoined President Esther George in dissenting from the majority statement. ChairYellen was questioned about the dissents, and she rightly pointed out that thedivergence of views was a positive indication that there was a healthy exchangeof opinions during the meeting, and that it helped to avoid"groupthink." So, while the committee may want to begin restoringinterest rates to a more normal level, in the face of ongoing uncertainty, itdecided to wait a bit longer before acting.