Fed Should Have Raised In Early 2014: Political Bias Is Coming Back To Bite?
By Roger Thomas
Fed Political Bias?
Although next month’s labor market report is likely to bounce back up, the underlying drift in hiring is slowing, as evidenced by the recent deceleration in month-over-month job growth or the years-long deceleration in year-over-year growth.
Wouldn’t it be nice if the Fed had some “non-goofy” firepower left to address weak economic conditions?
What is meant by “non-goofy” responses. Well, traditional tools at the Fed’s disposal include raising and lowering the Federal Funds target rate, changing reserve requirements, and attempting to manipulate market expectations, among others.
Less conventional tools – one might call them experimental tools – include such things as playing around with negative interest rates (the ECB and the BOJ are tinkering with this right now), meddling in long-term bond markets (also known as quantitative easing), and simply printing money (which is usually closely connected with playing in the long-term bonds market).
Another more interesting experiment being floated involves “helicopter money.” Helicopter money refers to an idea originally discussed by Milton Friedman that central bankers could simply print money to generate inflation (he would not suggest the Fed do it). This could potentially generate nominal economic growth.
The fact that these items are still on the docket seven years into the economic expansion suggests something is wrong.
Question: Did the Fed miss its chance at raising rates (perhaps for political reasons)?
Here’s a look at the economic indicators across this economic cycle and speculation on when the Fed should have raised rates.
The bottom line finding is that the Fed probably should have raised rates sooner, and that a likely political bias was behind the failure to act.
A Look at the Indicators
First, Employment. This graphic is the year-over-year growth in employment from 2005 to May 2016. The labor market started to re-accelerate in February 2014, and it looks like this would have been a strong date to begin raising rates.
Of course, hindsight is 20-20, but why did the Fed miss the likely best date for raising rates. Perhaps politics?
What About Industrial Production and Capacity Utilization? Did the Fed Miss the Boat Using These Two as the Guideposts?
The following two graphics are year-over-year growth in Industrial Production and Capacity Utilization.
What date looks reasonable?
Interestingly, early 2014 – consistent with the employment picture.
What About Retail Sales? Were They OK in Early 2014?
Does the Retail Sales picture support an early 2014 hike?
Interestingly, it does. Retail Sales began to expand in early 2014. A rate hike would have likely had no effect. And the Fed would now have some firepower on rates. The failure to act leaves the Fed with nothing.
So, Why Did the Fed Fail to Act?
Why did the Fed fail to act? Perhaps the 2014 midterm elections?
Speculating on whether the 2014 midterm elections drove the decision is useless. No one will ever find concrete statements or emails to that effect.
What is clear is the evidence on actions. And the action was the Fed failed to act.
What more evidence of the Fed’s bias? Here’s a look at Fed rate hikes during Republican and Democratic administrations.
Fed Political Bias ? – Conclusion
Although the job market is likely to bounce back next month, it looks like the labor market is in a downward drift.
The renewed weakness in the American labor market presents a problem for the Fed. It’s been behind the curve at raising rates during the current cycle and the firepower of lowering rates will likely be needed after the coming summer months.
In looking at the performance of the economy over the past seven, it appears the Fed should have begun to raise rates in late 2014.
Why has the Fed been so behind the curve this time around? It appears the dovish bias might stem from a Democratic bias. The current chairwoman was appointed by the sitting president. There’s no incentive to be tough on the man behind your rise to the top.