|
August 25, 2000
The Federal Reserve Open Market Committee's decision to leave its rate unchanged had little impact on mortgage rates. Locked in summer doldrums, mortgages are drifting near 8.00%.
"Recent data have indicated that the expansion of aggregate demand is moderating.... Nonetheless, the committee remains concerned about the risk of a continuing gap between the growth of demand and potential supply...."
There are only two demand/supply mismatches for the Fed to worry about: the tight labor market and the enormous, record-high trade deficit.
The Fed's classic labor market concern: how low can unemployment go before wage pressure triggers inflation?
The economists' term for the rock-bottom unemployment rate at the inflation threshold: "NAIRU", the "non-accelerating inflation rate of unemployment."
An army of economists at the Fed and outside have spent whole careers trying to develop a precise NAIRU. If the danger level could be identified, the Fed would know exactly when to raise interest rates, and exactly how many American citizens should be thrown out of work in order to achieve inflation safety.
Lovely. No more Fed-behind-the-curve, no more Fed-overdoes-it-playing-catch-up, no more recessions. The Holy Grail in hand at last: the Fed would reach fine-tuning perfection.
Lovely, except the value of NAIRU seems to vary from one economic cycle to another. No one has demonstrated long-term predictive value flowing from NAIRU models.
This unpredictable situation is especially disturbing to hawks at the Fed, who just know that 4% unemployment is too low. While they don't have the math or the models to support their certain knowledge, they would prefer to hike rates some more and throw a couple of million people out of work just to play it safe.
Mercifully, Alan Greenspan is impressed with the facts of the matter: so far, 4% unemployment isn't hurting anybody except employers struggling to find employees.
The trade deficit is another story of dysfunctional Holy Grail. Our trade deficit is roughly double the old cyclical record high: we are buying mountains of stuff from overseas, and flooding the world with dollars.
The dollar should be crashing, and should bring inflation pressure home. Should, should... but it ain't so. The world is delighted to receive dollars.
There is no long-term guarantee that these two imbalances will stay under control, but there is no sign of trouble justifying further Fed tightening.
Optimism is appropriate, but don't get carried away: the Fed has no reason to ease interest rates, either.
|
