I hope everyone has a great Fed Day.
Not everyone has a party. For this decision, there is, of course, the question of whether the data really back the interest rate cut that most people think is going to happen. But what about the bigger picture? How well did the Federal Reserve do in the first place at fighting inflation?
According to one study paper, inflation mostly went down because of things other than the Fed’s plan to raise interest rates. One estimate, based on the Federal Reserve’s own model of the economy, says that the rate hikes slowed down 40% of the rise in prices. Another, based on a model from former Federal Reserve Chair Ben Bernanke and former IMF top economist Olivier Blanchard, says that the effect was more like 20%.
What does it matter? Twenty percent is still something, right? It’s more than just the usual arrogance of central bankers; it’s a “broken macroeconomic model” in which the “inflation-expectations channel” is the most important part of how wages and prices change. The partying also takes attention away from the fact that the Federal Reserve still hasn’t dealt with or even acknowledged key reasons that are causing inflation, especially in the services sector, according to a paper by Thomas Ferguson and Servaas Storm that was praised by Panmure Liberum strategist Joachim Klement.
So why did prices go down when there wasn’t a recession? People around the world had less trouble getting goods, and the value of the dollar went up. But the writers say that one of the main reasons was that U.S. workers’ real wages went down. They say that falling real wages took the hit from the change in prices, unlike the 1970s when U.S. workers and unions could still protect their real wages from rising prices. That’s clear from the fact that the job cost index is falling behind consumer prices and the median real weekly earnings have been going down over time.
Even though interest rates went up, the economy had a “soft landing.” This was due to immigration, which increased the number of workers, and productivity gains, which were caused by a lot of money being put into artificial intelligence, which is “rapidly snowballing into a macroeconomic force.” But the point is that the rise in capital spending on AI wasn’t caused by the Fed’s interest rate hikes; it happened anyway. Also, immigration had nothing to do with the Fed.
It’s the rich and super-rich, along with the wealth effect, that the writers say keep spending going. That’s also making inflation in the services sector worse. “The flow of workers into high-end restaurants while day cares, nursing homes, and other low-wage jobs struggle is a particularly clear example, but it’s not the only one,” they say.
They are not positive about the situation with inflation because they are worried about things like weak antitrust enforcement, climate change that makes insurance and some parts of finance less stable, rising geopolitical tensions, and the power of money politics.
At the end, they point the finger at the Fed. “The pictures of the funfair in Jackson Hole and other places are not real. Central bankers say they will be “data driven” but their favourite models are way off,” they say.
