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Fed's Jerome Powell Won't Mess Up Strong Economy He's Been Dealt

Fed's Jerome Powell Won't Mess Up Strong Economy He's Been Dealt
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Tuesday, 12 December 2017 10:03 AM Current | Bio | Archive

This week, the Federal Reserve will likely have its last monetary policy meeting with both Jerome Powell and Janet Yellen in the building.

This provides an opportunity to look forward to where the economy is going and what polices the Fed will pursue to guard the integrity of the financial system and achieve full employment and reasonable price stability — these days, defined as 2% inflation.

For the first time since 2004, the economy is on the verge of registering three consecutive quarters of 3% or better growth. The recovery appears to have broken loose of most of the vestiges of the financial crisis as it pertains to consumer and business behavior.

The stock rally represents no asset bubble, as the recent run up has been paid for with improved earnings. For the S&P 500, price-to-earnings ratios are roughly in line with a year ago and historical averages. Earnings outlook is strong — if the market is ahead of itself, it is not by much.

The Trump administration has convinced businesses that Washington regulators will at least take lunch and summer vacations and not be looking for every available opportunity to bite at their heels. Powell’s moderate responses to Sen. Elizabeth Warren’s pointed questions during his confirmation hearings and President Donald Trump’s appointment of Randal Quarles as vice chairman for bank supervision indicate that more relief is on the way for banks.

Don’t think bankers have a free ride. Clearly, the thrust of the Trump administration is toward strict enforcement of the rules it keeps on the books — ask AT&T about its planned merger with Time-Warner or Wells Fargo about its transgressions.

However, bankers are no longer seen in the halls of regulatory power as DNA-determined malefactors incapable of responsible behavior.

As for monetary policy, Gov. Powell has indicated he will continue slow and steady normalization of interest rates and the gradual reduction of the Fed balance sheet from about $4.5 to $2.5 trillion. With or without a tax cut, the economy offers no reason for haste.

Factoring in a customarily slow first quarter — my gross domestic product forecasts are 3% in the fourth quarter and 1.4% in the first —with the economy returning to 3% the balance of 2018. That should put growth at 2.6% for the entire year.

Factor in a tax cut mostly aimed more at business investment than at households, an infrastructure package and perhaps labor-market, needs-based immigration reform, annual growth could bolt to 3.5%. However, of all those, only a tax cut is likely in the near term.

Suffice it to say, Jerome Powell will be making data-dependent determinations about monetary policy with growth humming along between 2.5% and 3.5%, and that simply should not result in an overheated labor market or shortage of capacity that will stoke up inflation any time soon.

According to the Department of Commerce, the economy is now running near full capacity but those estimates assume the current low rate of labor-force participation will continue, when these days, social programs permit many to stand on the sidelines when good jobs are not in the offing. Similarly industrial capacity utilization is only 77%, well below levels seen during pre-financial crisis expansions, and office and retail space are hardly in short supply.

Meanwhile, as the economy supposedly approaches full-employment as the Commerce Department measures such things, core inflation — the consumers’ spending price index, less food and energy — is crawling along at a low 1.4%.

Even some push from higher oil prices — assuming the Saudis can make production cuts stick and U.S. shale producers take a pass on pushing up production (unlikely) — the BEA can crunch numbers all it wants but unemployment has hardly reached inflation-threatening lows.

In some states and cities, movements toward higher minimum wages and other mandates — family leave and advance work schedule notification — are pushing a torrent of automation so intense that the San Francisco city council is considering taxing labor-saving machines and artificial intelligence software.

Negativism abounds on the professional left but look outside — supply-side economics works. Powell is no ideologue and will go with the flow as long as the data compels.

Peter Morici is an economist and business professor at the University of Maryland, and a national columnist. He tweets @pmorici1

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Peter-Morici
New Federal Reserve Chairman Jerome Powell won’t mess up the strong economy he will inherit from outgoing Fed Chair Janet Yellen as the slow and steady normalization of central-bank policy will keep America on track.
fed, jerome powell, strong, economy
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2017-03-12
Tuesday, 12 December 2017 10:03 AM
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