The Goldilocks Economy

The editors of Financial Times remark on the U. S. economy:

Financial markets are finding it hard to price in all these risks. Conflicting views mean asset prices will be particularly sensitive to new data and comments by Fed officials. For investors, the surprising jobs numbers highlight the risks of taking aggressive positions when uncertainty remains high — and of cherry-picking data to fit a narrative. Making sense of the US economy after recent shocks requires a degree of humility. The Fed, meanwhile, needs to remain steadfast in its aim to get inflation back down to target and ensure its communications are clear, at the same time remaining alive to financial stability risks as markets oscillate and reprice positions. Whether the landing for the US economy is soft or hard, there will be plenty of turbulence on the way there.

We cannot simultaneously have “soft landing” and a “hard landing”. We do not have “Schröodinger’s economy”. Scott Sumner’s observations about the Fed’s actions may be relevant. I take the liberty of a lengthy quote:

Monetary policy is about aggregate demand. Fiscal policy is about efficiency. The profession made a huge mistake in conflating the two policies.

PS. There are a few signs the economy might actually be speeding up:

Vacancies at US employers unexpectedly increased at the end of 2022, illustrating a solid appetite for labor that the Federal Reserve sees as one of the last hurdles to bring down inflation.

The number of available positions climbed to a five-month high of just over 11 million in December from 10.4 million a month earlier, the Labor Department’s Job Openings and Labor Turnover Survey, or JOLTS, showed Wednesday. The increase was the largest since July 2021 and mostly reflected a jump in vacancies in accommodation and food services.

(While I’m doing my annoying “I told you so” routine, I might as well add that I ridiculed those who claimed two falling quarters of GDP meant we were in recession during early 2022. I don’t recall any previous recessions with record job openings.)

Tyler Cowen has a post discussing the possibility of the economy reheating, and has this to say:

Another possible pathway for these scenarios involves interest rates. During a normal disinflation, the Federal Reserve raises rates and keeps them high for a long period of time while the economy adjusts slowly — often passing through recession. But inflation has fallen more rapidly than expected, and so the market may expect the Fed to lower interest rates sooner than planned. And an expected cut in interest rates can encourage expansionary pressures just as much as an actual cut in interest rates.

It is a funny world in which slow inflation can cause faster inflation. It’s the logic of expectations that makes it possible, albeit far from certain.

Of course this would not be a case where low inflation is directly causing high inflation. Rather, if this happened it would be a case of the Fed looking at inflation when it should be looking at NGDP growth, and wrongly concluding that monetary restraint is no longer needed. Persistently excessive inflation is always and everywhere a monetary policy failure.

There is a rule of thumb which might be relevant. When your fudge factors are an order of magnitude larger than your measured results, check your assumptions. That’s presently the case with employment. As I’ve said before I use the “duck test” (if it walks like a duck and quacks like a duck it’s probably a duck). That would lead us to suspect the BLS is overestimating employment. If total employment has been mediocre rather than what the BLS has been reporting, I would think a “hard landing” would be more likely.