By C. Jay Engel
As Jeffrey Lacker leads the pack on the Fed’s “concern of overheating” front, last Friday’s 2016 fourth-quarter GDP numbers completely contradict the narrative. Coming in at a paltry 1.85% growth rate, the Fed was handed yet another excuse to push off the so-called “normalization of interest rates” further into the future. The Fed's FOMC again confirmed as much at its February meeting.
The Fed has stated for years - since 2008 - that it needed to keep interest rates low in order to support a sustainable recovery. The Fed was allegedly paying close attention to its Congressionally-sourced dual mandate to determine when it could start allowing rates to rise. But now it is 2017 and the Fed’s bureaucratic statistics relating to unemployment and price inflation say things are just dandy. But the GDP numbers, which purport to measure growth, scream the opposite.
This is the Fed’s predicament. It has held that the dual mandate was its only guide, but it’s becoming quickly evident how irrelevant those numbers are. As it turns out, the third quarter’s 3.5% GDP number was not a sign of coming paradise, but was rather a mocking anomaly. In the past six quarters, only once (third quarter 2016) did the GDP growth rate come in above 2%.
Moreover, things are getting worse, not better. 2016’s average growth rate was worse than both 2014 and 2015. Needless to say, Yellen’s credibility, to use a word of the mainstream, should be absolutely shattered. Stimulus and quantitative solutions have been an epic failure.
In light of this, the Fed’s decision to raise the target Federal Funds rate over the coming months is especially painful. Should it chooses to do so, it does it in the face of a growth rate that is barely treading water. But if it chooses to prolong these target rate hikes, it does so as its own dual mandate components tell it, it should be normalizing monetary policy by now.
Of course, these PCE (personal consumption expenditure) and Official Unemployment numbers tell us almost nothing about the real economy. But then again, the Fed can’t admit this either, can it?
Finally, all the above doesn’t even take into account that Fed Funds rate itself is just a smoke-and-mirrors target that is actually not very important. What truly matters, as Joe Salerno points out, is the expansion of the money supply. That is the true villain in all this.
Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
Disclosure: No positions.