All of a sudden, several Federal Reserve officials are speaking out…providing "forward guidance"…about the future of economic policy.
"Several Federal Reserve officials, in their first public comments since raising short-term rates last month, signaled Friday they still favor lifting them further this year," writes Michael Derby and Shaynke Raice in the Wall Street Journal.
Some officials are sure about two increases coming this year, but that there is a real possibility that three increases will take place. One even suggested that there could be more than three increases.
All speakers are presidents of District Federal Reserve Banks, from Cleveland, Ohio, Richmond, Virginia, Chicago, Illinois, and Dallas, Texas.
Sam Fleming in the Financial Times presents the views of John Williams, the president of the San Francisco Federal Reserve bank, who believes that there is little or no need for any short-term fiscal policy stimulus at this time because of the current strength in the labor market.
Mr. Williams suggested "economic policy would be best helped by federal actions that ensured a sustainable budget deficit and boosted long-term (labor) productivity."
The question arises: Is this an all-out campaign by Federal Reserve officials to keep the new Trump administration and the Republican Congress from rapidly and "foolishly" throwing a lot of short-term "budgetary loosening" at the economy in an attempt to get favorable ratings in the polls?
I don't know when I have heard such a wide-spread effort on the part of Federal Reserve officials to "set the stage" for the budgetary debates that are going to take place this year.
It appears as if Federal Reserve officials are coming more and more to the conclusion that little or nothing…in the short-run…can result in much additional economic growth at this time.
The compound rate of growth of the US economy since the beginning of the current economic recovery has been 2.1 percent and Federal Reserve officials are not expecting much improvement, if any, over the next several years.
It seems as if research within the Federal Reserve System is focusing more and more on the slowdown in the growth rate of labor productivity, which more or less, constrains the ability of the US economic to grow much more rapidly.
Therefore, given that the unemployment rate in the United States is 4.7 percent, and given that wages have begun to increase more rapidly, economists within the Fed are arguing that little or nothing in terms of faster economic growth can be gained within the labor market by further short-term efforts at stimulus, either monetary or fiscal.
Although the laughing is being muffled, it is hard to believe that Federal Reserve economists can talk about the Trump administration achieving a 3 percent or 4 percent rate of economic growth over the next four years with some kind of sly smile showing up on their faces.
Furthermore, if the Federal Reserve does raise interest rates three or more times this year, there is the very strong possibility that this would put more pressure on the US dollar further complicating the policy discussions of the Fed…and the federal government.
So, we seem to have another factor entering into the policy making picture for 2017…the Federal Reserve seems to overtly be campaigning for fiscal restraint on the part of the incoming Trump administration.
And, I think, this just indicates that economic thinking and economic policy-making are in the process of change. More and more I am seeing articles…and in professional economic journals as well as in news magazines like the Economist…that economists are thinking through the past eight- to ten-years…or even longer…and are reassessing their models to see what has worked and what hasn't worked.
These economists are also struggling with questions having to do with what policy prescriptions work and which ones don't do so well.
In this respect, the proposals coming from the incoming Trump administration seem to be coming from "slaves of some defunct economist" using a quote from the defunct economist John Maynard Keynes.
How this battle between the Fed and the Trump administration works out will be very important to the future of the United States economy, businesses, and investors.
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