If the Federal Reserve waits for unemployment to drop meaningfully before raising rates, it will be much too late, writes John Mauldin in Thoughts from the Frontline.
The Fed has a dual mandate from Congress. One is to promote stable prices and the other is to foster employment.
However, the Fed is in a tough situation right now.
Unemployment in today’s economy is structural in nature, not cyclical. It is going to be a long time before we get back to 6% unemployment.
If we could create 6 million jobs over the next four years, that would just about do it. But for that to happen, we need to see a string of solid job reports, better than we have had the last nine months.
But other economic data is improving. And inflation is turning back up. The ECRI Future Inflation Gauge has been up for three straight months and is starting to show that worries about deflation, absent a shock to the economy, are going away. Core inflation is still up only 1% from a year ago, while overall inflation is up 1.6%.
But I want you to note the chart below from the recent BLS release. Notice that inflation for the last six months has risen rather smartly. And for the last three months, inflation on an annualized basis is running over 3%, if I did the math correctly.
Normally that would signal the Fed to start raising rates. But Federal Reserve Chairman Ben Bernanke said recently that “until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established.”
There you have it. Bernanke tells us that rates are going to be low until we see stronger job creation. But with the Fed's bond purchases (aka QE2) and rising inflation, there is the risk that the Fed’s two mandates may come into conflict.
It takes at least 12 months (or longer) for monetary policy to work its way into the economy. The current small rise in inflation is not due to QE2. That will show up later.
It appears to me the deflation war, at least for the time being, is won (the next recession will bring that worry back). But now, it is time for the adults at the Fed's Federal Open Market Committee to stand up and say stop the printing presses.
Next: Not No, Hell No!
|pagebreak|Not No, Hell No!
I remember going to my Dad on a few occasions and asking for permission to do something he wasn’t happy about. He would look at me and say, “Son, not no, but hell no!”
I hope there are members of the FOMC who will vote “hell no” at the next Fed meeting. Further, if we leave rates too low for too long, what will the Fed do when this business cycle comes to its end, as they always do?
We need to put some bullets back into the Fed arsenal. It is time to start thinking about raising rates.
This will help savers who are reaching for yield. “Junk” bonds are now at an all-time low of 6.84%. Less than two years ago it was north of 20%. Talk about a run!
Why? It is yet another aspect of the Fed maintaining rates at too low a level, as the Boomer generation is trying to get as much as it can out of its savings, and the charts on high-yield funds show them going from the lower left to the upper right in quite a sporting fashion.
Is there some more capital appreciation left in this run? Maybe. But the big move has been made.
We as a nation need to understand that the problems we face are not ones that can be dealt with by business as usual. Keynesian stimulus is precisely the wrong medicine. The problem is one of too much debt.
We were promised by Bernanke in 2002 that if the Fed moved out the yield curve, long rates would come down. The opposite has happened. Since the beginning of QE2, mortgage rates have risen by 1%. The yield on the ten-year bond is up over 1% since the announcement of QE2.
It’s time for the Fed to declare victory and go home.
