The Fed’s Irrelevance Is a Beautiful Thing

Jun. 12, 2019
Bob Adelmann

When President Trump tweeted "The United States has VERY LOW INFLATION, a beautiful thing!" on Tuesday morning, he was referring to the latest PPI numbers from the Labor Department. For May, its Producer Price Index came in at a benign and nearly invisible 0.1%. Year over year the PPI was just 1.8 percent, down from 3.1 percent last summer.

Trump should have been referring to the quiescent Fed, which is in a state of confusion. By this time, according to standard interventionist (Keynesian) theory, a 10-year-old economic expansion should be exhibiting signs of inflationary pressures. Instead, real price increases are approaching low levels not seen in years.

The Fed chair Jerome Powell has repeatedly stated that his "target" is 2.0 percent inflation. His reasoning? Lower than that is a sign of a stagnant and underperforming economy. Higher than that is a signal of incipient inflation, which the Fed then is called upon to rein in through monetary tightening.

But not this time.

News from the New York Federal Reserve bank reported on Monday that the outlook for future inflation looks rosy as well. Consumers polled by the central bank see even lower inflation over the next one to three years. This matches the inflation numbers coming from the Fed's preferred inflation measure, the PCE (personal consumption expenditures) index.

This puts the lie to concerns about tariffs costing consumers more. It also raises the question of why the Fed considers low inflation a threat. Not to worry, said John Williams, president of the New York Fed: "I expect inflation … to move gradually back up to 2%."

But why? The tight jobs market has in the past triggered rising prices as businesses bid wages higher to obtain the talent they need to grow. But not now. The Labor Department reported on Monday that the gap between job openings (7.5 million) and those unemployed (6.2 million) is the highest on record, reflecting a robust and growing economy.

What's different this time? Over the past twelve months, the Fed has sold off $500 billion of its government bonds, thus reducing the stock of currency by that amount. That is deflationary, a reversal of previous policy which portends all manner of good things for the American consumer.

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First of all, the average worker has more faith that his wages and raises will keep their purchasing power over time. Second, American business owners will worry less about projecting costs into the future and can make future investment plans with greater confidence. Third, the consumer who finances will find his car payments and home mortgage payments staying within his budget.

In addition, the United States becomes an even more attractive place for global firms to invest when compared to China, Russia, and other competitors who have weaker currencies and whose values are subject to political manipulation.

In a perfectly free economy, prices would edge ever lower as greater efficiencies reduce costs on most every item. When Henry Ford installed the first moving assembly line in 1913, he reduced the time it took to build his Model T from more than 12 hours to two hours and 30 minutes. That meant, according to Ford, that the Model T "will be so low in price that no man making a good salary will be unable to own one."

And then he raised his workers' wages to an unheard of five dollars a day, ensuring that his workers would be able to own one.

The real question becomes, why are there price increases at all in an economy that is becoming ever more efficient at building things?

At the moment the interventionist Fed is keeping its hands off. And that's a beautiful thing.



The Wall Street Journal: U.S. Producer Prices Up Slightly in May, Showing Little Inflation Pressure

The Wall Street Journal: U.S. Job Openings Outnumber Unemployed by Widest Gap Ever

The Wall Street Journal: U.S. Inflation Expectations Decline to Lowest Level Since Late 2017, N.Y. Fed Says

MarketWatch: U.S. wholesale prices barely rise, PPI finds; Inflation poses little threat to economy

Bio on John Williams, President of the Federal Reserve Bank of New York

One year chart of Federal Reserve's balance sheet Ford's assembly line starts rolling

Henry Ford's Model T was the first car for the masses.

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