Still getting caught up after a busy last week!
Last week Federal Reserve Vice Chair for Supervision Randall Quarles channelled former Fed Chair Alan Greenspan in a rare speech on the economy. Notably, Quarles offered considerable optimism, particularly with respect to the supply side of the economy. He sees room for further expansion of the labor force and, I suspect more importantly, reasons to think that productivity growth will soon accelerate. His optimism on productivity growth stems from recent gains in capital spending and his self-described techno-enthusiasm. In addition, he views favorable the “let the economy run hot” theory in which tight labor markets induce firms to make labor-saving improvements to their operations.
The policy implication:
The more the economy’s potential growth increases, the more gradual we can be in our removal of monetary policy accommodation. Thus, an assessment of the pace of potential growth will be an important input into what I view as the appropriate path of policy to achieve our objectives of maximum sustainable employment and price stability.
In Q&A, he expands further (via Bloomberg):
In a dovish signal, Quarles said that his “preferred path for policy is more gradual than I think many other people’s because of my optimistic assessment.”
To be sure, Quarles still anticipates continued gradual rate hikes. He hypothesizes that sticky inflation expectations may be hiding building inflationary pressures that could eventually emerge. While not a primary risk, it is sufficient risk to justify edging rates higher. That said, Quarles is on the low side of the dots.
Quarles sounds like he wants to walk in Greenspan’s footsteps. Recall that Greenspan famously delayed rate hikes in the late 1990s, believing that accelerating productivity growth justified a more dovish policy path. The difference is that Greenspan had firmer reasons to believe that productivity growth was accelerating. Quarles appears to be operating more on hope than data; note that the median longer run growth forecast presented in the Summary of Economic Projections has been stuck at 1.8% since being downgraded in 2016. His colleagues clearly don’t appear to be so optimistic.
Quarles’s speech, which included a supply-side wink to the tax cuts, must have been music to the ears of President Donald Trump. Trump looks to be having a bit of buyer’s remorse with respect to his selection of Federal Reserve Chair Jerome Powell. Last week he called the Fed his “biggest threat” while seeming to regret his choice of Powell (via CNBC):
“I’m not blaming anybody, I put him there,” Trump said of Powell. “And maybe it’s right, maybe it’s wrong. But I put him there.”
Will anything come of Trump’s ire? Well, maybe. Note that it looks like Nellie Liang’s nomination is in trouble. Liang, a Democrat and supporter of bank regulation, might not even make it out of committee. Indeed, given the apparrent opposition, one wonders how Liang even received the nomination in this political environment. (My answer: Too many people still expect the Fed to exit the Trump years unscathed).
Suppose Liang doesn’t make it out of committee. Further suppose that Trump’s ire at the Fed’s policy path means he doesn’t defer to Powell on the replacement nominee. Trump would be free to find a Quarles-like nominee. Moreover, Trump could pull the nomination of Martin Goodfriend, which is languishing in the Senate, and again find a more ideologically-minded replacement. Trump could have remade the Fed; he might now be realizing the lost opportunity and not want to dig his hole any deeper. Ironically, he could probably reach across the aisle and call the Fed Up staff for recommendations.
On the data front, there is nothing to stop that December rate hike. Unemployment claims remain low and show no signs of labor market deterioration:
The JOLTS numbers confirm the strength of the current American jobs machine. Job openings in August climbed to another record high. And confident workers are quitting their jobs at a pace not seen since 2000:
The nation’s factories are churning out product in September:
Housing is a bit of a week spot, with flattish single family starts for much of this year and evidence that multi-family housing is off its peak:
Moreover, existing home sales have clearly softened in recent months. I think that demographics still support the housing market over the medium term, but also think that high prices, higher mortgage rates, and slowing rent growth are all sapping some of the demand from housing. The keys question is how much of a drag will this become? It is worth noting that housing has not been a consistent contributor to GDP growth for awhile- and contributed negatively the last two quarters:
Hence the downside might be fairly limited. That said, this could become part of a moderation in activity that forces the Fed to rethink their policy path.
Bottom Line: Fed on path to hike rates in December, and the data is no obstacle. I don’t think that Powell will start setting the stage for an imminent pause to please Trump. But Trump could vent his frustrating with his choice of future nominees to the Federal Reserve Board.