Homepage / Currency / The Federal Reserve risks truncating a recovery with room to run
Amazon says this Prime Day was its biggest shopping event ever Kudlow says President Trump is 'so dissatisfied' with China trade talks that he is keeping the pressure on As stocks regain their footing, an ominous warning looms Goldman Sachs downgrades Clorox to sell, says valuation is 'unsustainably high' How Satya Nadella has spurred a tripling of Microsoft's stock price in just over four years Kudlow says economic growth could top 4% for 'a quarter or two,' more tax cuts could be coming The one chart that explains Netflix’s stunning comeback US housing starts plunge 12% in June to a nine-month low Aerospace titans Boeing and Airbus top $110 billion in orders at Farnborough Target uses Prime Day to its advantage, logging its 'biggest online shopping day' so far this year Billionaire Marc Lasry sees bitcoin reaching up to $40,000 as it becomes more mainstream and easier to trade These are the 10 US airports where you're most likely to be hacked Amazon shares slightly higher as investors await Prime Day results Wreck of Russian warship found, believed to hold gold worth $130 billion A bullish ‘phenomenon’ in bond market is weeks away from fading, top credit strategist says Stocks making the biggest moves premarket: MS, GOOGL, TXN, UAL, NFLX & more Twitter shares up 50% since late April means most upside priced in, analyst says in downgrade EU fines Google $5 billion over Android antitrust abuse Mortgage applications fall 2.5% as buyers struggle to find affordable homes America may not have the tools to counter the next financial crisis, warn Bernanke, Geithner and Paulson Investors are getting spooked as the risk of a no-deal Brexit rises EU expected to fine Google $5 billion over Android antitrust abuse Ex-FBI chief James Comey urges Americans to vote for Democrats in midterm elections Elon Musk apologizes to British cave diver following baseless 'pedo guy' claim Disney, Comcast and Fox: All you need to know about one of the biggest media battles ever Xiaomi shares notch new high after Hong Kong, mainland China stock exchanges reach agreement The trade war is complicating China's efforts to fix its economy European markets set for a strong open amid earnings; Google in focus Hedge fund billionaire Einhorn places sixth in major poker tournament The biggest spender of political ads on Facebook? President Trump Asian stocks poised to gain after Fed's Powell gives upbeat comments; dollar firmer Stocks are setting up to break to new highs Not all FAANG stocks are created equal EU ruling may be too little, too late to stop Google's mobile dominance Cramer explains how Netflix's stock managed to taper its drop after disappointing on earnings Airbnb condemns New York City's 'bellhop politics,' threatens legal retaliation Amazon sellers say they were unfairly suspended right before Prime Day, and now have two bad choices Investor explains why 'duller' tech stocks can have better returns than 'high-flying' tech names Elon Musk is 'thin-skinned and short-tempered,' says tech VC Texas Instruments CEO Brian Crutcher resigns for violating code of conduct Google Cloud Platform fixes issues that took down Spotify, Snapchat and other popular sites Uber exec: We want to become the 'one stop' transportation app 'What a dumb hearing,' says Democrat as Congress grills tech companies on conservative bias Amazon shares rebound, report says Prime Day sales jumped 89 percent in first 12 hours of the event How to put your medical history on your iPhone in less than 5 minutes Investment chief: Watch these two big events in 2018 Even with Netflix slowing, the market rally is likely not over Cramer: Netflix subscriber weakness debunks the 'sky's the limit' theory on the stock Netflix is looking at watch time as a new area of growth, but the competition is stiff Why Nobel laureate Richard Thaler follows Warren Buffett's advice to avoid bitcoin Rolls-Royce is developing tiny 'cockroach' robots to crawl in and fix airplane engines After Netflix plunge, Wall Street analysts forecast just tame returns ahead for the once high-flying FANG group Roku shares rise after analyst raises streaming video company's price target due to customer growth China is investing 9 times more into Europe than into North America, report reveals Amazon says US Prime Day sales 'so far bigger than ever' as glitch is resolved Netflix is on pace for its worst day in two years US lumber producers see huge opportunity, rush to expand San Francisco to consider tax on companies to help homeless Homebuilder sentiment, still high, stalls as tariffs, labor and land drive up costs Powell backs more rate hikes as economy growing 'considerably stronger' Netflix history is filled with big stock declines – like today – followed by bigger rebounds Intel shares get downgraded by Evercore ISI due to rising competition from Nvidia, AMD Petco aims to reinvent the pet store with something you can't buy online Genetic testing is coming of age, but for consumers it's buyer beware Tech 'FAANG' was the most-crowded trade in the world heading into the Netflix implosion, survey shows Netflix weak subscriber growth may indicate a 'maturity wall' that could whack the stock even more: Analyst This chart may be predicting the bull market's demise Wall Street says Netflix's stock plunge is a ‘compelling’ buying opportunity because the streaming giant ‘never misses twice’ Tesla sinks after Musk tweets, again Boeing announces new division devoted to flying taxis Stocks making the biggest move premarket: NFLX, UNH, GS, AMZN, WMT & more Deutsche Bank downgrades Netflix, but says big subscriber miss is not 'thesis changing' IBM is experimenting with a cryptocurrency that’s pegged to the US dollar North Korea and Zimbabwe: A friendship explained Virgin Galactic spinoff Orbit to launch rockets from the UK with space deal Artificial intelligence will create more jobs than it destroys? That’s what PwC says ‘Treasonous’ Trump and ‘Putin’s poodle:' Scathing headlines follow the Trump-Putin summit China’s fintech companies offer ‘enormous’ opportunity, investment manager says Trump's performance at summit with Putin was 'unprecedented,' experts say Walmart and Microsoft link up on cloud technology as they both battle Amazon European stocks seen mixed amid earnings; Fed’s Powell to address Congress How I knew I should quit my day job and run my start-up full-time: Viral website founder China's stocks have been trounced, but the trade war may ultimately be good news for those shares Billionaire tech investor Peter Thiel bets on crypto start-up Block.one Asian shares subdued open after mixed close on Wall Street; energy stocks under pressure Amazon cloud hits snags after Amazon Prime Day downtime Netflix isn't doomed by one quarter unless people start questioning the long-term investor thesis Tech stocks set to sink on Tuesday after rough evening for ‘FANG’ Netflix plummets after missing big on subscriber growth This wristband lets humans control machines with their minds The U.S. has a rocky history convincing Russia to extradite computer criminals Amazon suffers glitches at the start of Prime Day Jeff Bezos is now the richest man in modern history 'The United States has been foolish': Read Trump and Putin's full exchange Goldman Sachs recommends these 5 highly profitable companies — including Nvidia — to combat rising inflation Goldman Sachs releases 'tactical' stock picks for this earnings season Three red flags for Netflix ahead of its earnings report The bond market may be raising recession fears, but don't expect one anytime soon Cramer: Banks are 'making fortunes' but are still as hated as they were during the financial crisis Putin told Trump at summit: Russia never meddled in US election

Currency

The Federal Reserve risks truncating a recovery with room to run

WHEN it comes to inflation, the Federal Reserve sometimes resembles a child freshly emerged from an age-inappropriate horror film. To its members, runaway price increases seem to lurk in every oddly shaped shadow. On June 14th America’s central bank raised its benchmark interest rate for the third time in six months, even as inflation lingered below its 2% target, as it has for most of the past five years. Some critics reckon the Fed’s 2% inflation target is too constraining. Indeed, in recent comments on a letter from prominent economists calling for a higher target, Janet Yellen, the chairman, signalled openness to the idea. But the Fed’s problem is less its target than an unforgiving pessimism about American productivity. If its bleak view is wrong, the Fed itself is partly to blame for slow growth.

Economists generally treat productivity growth as a “real” factor, outside central-bank control. Thus, it is thought to depend on things such as technological progress, workers’ skill levels and the flexibility of the economy. But productivity growth is cyclical: it varies depending on whether an economy is booming or busting. Central banks might therefore have more influence over it than they are prepared to admit.

  • A new front in the legal fight over Donald Trump’s travel ban

  • Qatar Airways wants a 10% stake in American Airlines

  • Ireland and Afghanistan become the first new Test nations in 17 years

  • Ireland and Afghanistan become the first new Test nations in 17 years

  • Why calculating a British parliamentary majority is so tricky

  • Humanist nuptials are popular in Scotland but only beginning in Ulster

Economies have a growth speed limit, determined by changes in population and productivity. When unemployment is high, the economy can grow faster than this speed limit without an acceleration in inflation, since firms can expand by hiring unemployed workers. As the number of jobless workers shrinks, this option disappears. Eventually, firms hoping to grow must raise wages to poach the workers they need from other companies. As wage costs rise, prices must go up to cover the bill, fuelling a cycle of accelerating inflation. “The risk would be that the economy would crash to a very, very low unemployment rate,” said William Dudley, president of the New York Fed, on June 19th, describing a scenario most Americans may find less than horrifying.

Yet before that point firms have other ways to manage increased demand. They might give their current workers more hours, or push them to work harder. Some have the option to outsource work to foreign contractors or invest in robots. Even rising wages need not translate into higher inflation. Firms may choose lower profits over higher prices and reduced market share. They might also pair wage increases with investment in training and equipment in order to raise workers’ productivity. In an economy in which the central bank permits inflation to jump around, it should be clear when these other opportunities are exhausted: when inflation begins to rise sharply. So long as inflation remains low and stable, it is possible that productivity-boosting steps are still being left on the table.

Could this be happening now? Some evidence suggests so. Until the mid-1980s productivity grew faster when a boom gathered pace; it slowed in recessions. Since then, the opposite has been true; productivity growth leaps in recessions and wheezes during booms. Structural changes in the economy may help account for this change. Increased labour-market flexibility might make it easier for firms to sack workers in bad times, boosting average productivity; they can rehire low-skilled workers later. But other factors probably matter at least as much, according to work published last year by John Fernald, of the San Francisco Fed, and Christina Wang, of the Boston Fed. In particular, technology may be contributing to economic fluctuations in a new way.

Routine procedures

Around the time productivity began to leap during recessions, America also began suffering a rash of jobless recoveries (see chart). In a paper published in 2015, Nir Jaimovich, of the University of Zurich, and Henry Siu, of the University of British Columbia, argue that this is because firms began responding to recessions by eliminating routine jobs (like repetitive factory or call-centre work) through reorganisation, outsourcing and automation. Firms used recessions to implement labour-saving structural changes that raised productivity and made it easier to accommodate rising demand in the early stages of a recovery without hiring new workers.

The shift to a low-inflation world can help to explain this phenomenon. Firms tend not to cut their workers’ nominal wages (the numbers on the pay cheque), and when inflation is low they cannot achieve such large savings by keeping pay constant in the face of rising prices. They therefore have little choice but to make lay-offs—and to take additional steps to make the remaining, expensive workers more productive.

What is more, technological progress itself is contractionary if the central bank does not recognise it is occurring, according to a seminal paper, published in 2006, by Susanto Basu, of Boston College, Mr Fernald and Miles Kimball, of the University of Colorado. New technologies generally reduce labour demand and inflation in the short run. That would not be so if central banks observed that this was happening and responded with more accommodative policy. They rarely do.

The rare exception makes the point. In March 1997 the American economy seemed to be running at close to full tilt. Inflation was just a shade over 2%. The unemployment rate stood at 5.2%. In the eyes of the Fed, then run by Alan Greenspan, it was very nearly time to pull away the punchbowl. Yet, though the Fed voted for a 0.25% interest-rate increase at that meeting, its plan for a series of rate rises was subsequently ditched when it changed its collective mind. Unemployment eventually fell below 4%; since the early 1980s no other period has matched the late 1990s for growth in labour productivity and real pay.

The only way to know if America can manage a repeat performance is to test the economy’s limits. The transition from a 2% target to a higher one would offer a chance for such an experiment. As it is, a central bank hell-bent on keeping inflation low and stable risks cutting short a boom with room to run.

Source: economist
The Federal Reserve risks truncating a recovery with room to run

Comments are closed.