The Fed: Friend, Foe … or Fall Guy?

Lately, attitudes toward the Federal Reserve Bank of the United States tend to fall into two camps.

On one side, you have investors making big money from the Fed’s extremely low interest rates and corporate credit market policies.

They love the Fed and advise the bearishly inclined not to fight it.

On the other side, you have old-school inflation worriers. They’re convinced the Fed’s so-called “money printing” will lead to higher prices.

Bizarrely, at a time of unprecedented joblessness, this crowd is still worried that easy money will lead to too much employment and thus rising wages.

But all this emphasis on the Fed, pro and con, is misplaced.

The real problem lies elsewhere … and if it ever gets resolved, investors can expect to see some real fireworks.

The Fed’s Great Experiment

Last week, Chairman Jerome Powell announced that the Fed will change the way it manages inflation.

There will be no more interest rate hikes in response to falling unemployment to head off inflation before it starts. Instead, it said it will wait until inflation occurs before raising rates…

As I explained in my Bauman Daily YouTube video last Friday, ever since the 1950s the Fed has been guided by an economic concept called the Phillips curve:

The Phillips curve assumes the main driver of inflation is rising wages. It further assumes that the official unemployment rate — which only measures people actually looking for a job — is an accurate measure of labor scarcity.

Ergo, if the employment rate begins to fall, don’t wait for inflation. Raise interest rates immediately to choke off economic activity and stop it before it starts.

The problem is the Phillips curve isn’t working as it used to. Unemployment fell to around 3% in 2019 and we didn’t get any meaningful inflation.

But the Fed isn’t abandoning the concept. It’s just conducting a real-world experiment to see at what level of unemployment that curve will manifest itself.

I like this experiment. I’ve long maintained that today’s labor market conditions are radically different from the period between World War II and the late 1970s.

In those days, the employment rate for economically active male workers was consistently high.

Workers in the biggest and most important industries tended to be unionized. That gave them the ability to build cost-of-living adjustments into their contracts.

But just like the Fed before its recent policy shift, these contracts didn’t wait for inflation to happen before they were triggered. Workers got automatic increases, which led to inflation. They were a self-fulfilling prophecy.

By contrast, today the labor force participation rate is at a historical low. Millions of people are no longer looking for work.

Millions more are employed in unsteady, low-paying “gig” jobs that don’t add much value to the economy. Intense competition for this kind of work keeps wages low.

Most importantly, the percentage of unionized workers in the private sector has fallen from over 30% in the 1950s to 6% today.

That explains why the Phillips curve doesn’t work anymore. Low headline unemployment numbers don’t reflect actual labor scarcity … and they certainly don’t reflect labor’s ability to demand higher wages.

But Wait, There’s More

In an opinion piece in The Wall Street Journal a few weeks ago, Greg Ip argued that the Fed is being asked to solve problems it wasn’t designed for.

Ip doesn’t have a problem with the Fed’s shift on inflation targeting.

But he’s worried that the Fed is increasingly being asked to address other problems, such as racial wage disparities, climate change and similar issues. Ip thinks this will lead the Fed to overshoot the target on inflation, causing recessions.

I agree with him that the Fed isn’t designed to address those issues, and it shouldn’t be asked to try. But his concern about inflation is misplaced.

Frankly, I don’t think anything the Fed can do is likely to lead to higher inflation.

That’s because inflation in the real economy comes from a combination of A: real scarcity of labor and B: too much money available in the real economy relative to national output.

The problem right now is that the Fed’s policy tools only allow it to pump new money into asset markets such as stocks and bonds.

It has no mechanism to get newly created money into the hands of ordinary people who spend money on real goods and services.

On top of that, there is an abundance of underemployed labor in the economy.

That’s why the Fed’s easy money policies aren’t producing inflation in the real economy … only in the stock market.

Whose Job Is It, Anyway?

The debate about the Fed obscures the real problem.

The only constitutional and statutory mechanism to introduce new money into the real economy is spending by the federal government. The Federal Reserve is neither authorized nor designed to do this.

Some new Fed money made its way into the real economy this year, but only indirectly. Those stimulus checks and extended unemployment benefits were thanks to money it lent to the Treasury Department.

That hasn’t caused inflation because almost all of it was spent on necessities such as food and rent, or put into savings … or the stock market.

But that could change very quickly if the federal government decides to change its ways.

Since the 1980s, the federal budget deficit has increased dramatically. But that’s not because of increased government spending. It’s because of continual tax cuts without corresponding cuts to spending.

If the federal government increased taxation on high earners and redistributed that revenue to low-income households — especially if it did so through work programs — the U.S. economy would light up like a Roman candle.

The big question is whether that would lead to inflation.

The Fed has decided to conduct an experiment to see whether changing its policies will lead to inflation.

Maybe it’s time for the federal government to do the same thing?

Kind Regards,

Turn Your Images On

Ted Bauman

Editor, The Bauman Letter

Previous Post
Next Post

Comments

stornobrzinol

I got what you mean ,bookmarked, very decent internet site.

Blffdk

dapoxetine 60mg – can you buy generic cialis where to purchase cialis online

Merkurymarket étkezőszékek

I’m impressed, I need to say. Actually hardly ever do I encounter a blog that’s each educative and entertaining, and let me inform you, you’ve got hit the nail on the head. Your concept is outstanding; the problem is something that not enough individuals are talking intelligently about. I am very completely happy that I stumbled throughout this in my seek for one thing referring to this.

Kiihno

best over the counter ed pills – cheap ed pills which high blood pressure medication causes erectile dysfunction

Ztaykn

prednisone 2.5 – generic prednisone 20mg prednisone 5mg cost

Tkazrf

modafinil side effects – generic provigil provigil dosage

Csonhk

accutane for sale canada – accutane pills online accutane price usa

Kczqbv

walgreens amoxicillin price – buying amoxicillin over the counter amoxicillin 500mg capsules

Tkyyjz

buy vardenafil online cheap – buy real vardenafil vardenafil 20 mg

Nqeczt

stromectol 3 mg dosage – ivermectin 0.2mg ivermectin 3mg

Ykmulj

canadian pharmacy viagra 100mg – where to buy cheap cialis pills online tadalafil 40 mg india

Aqtpbi

ivermectin dosage – ivermectin 200

Vkdxvj

accutane tablets buy online – how do i get accutane where to buy accutane in canada

Yjsjyp

lyrica 75 mg price in canada – online pharmacy costco online pharmacy

Bvjudv

bulk order amoxicillin in usa – amoxicign.com buy amoxicilin 500 mg online canada

Gurlrs

ivermectin 3mg tablets – ivermectin human ivermectin buy australia

Jektmx

prednisone uk online – buy deltasone online prednisone otc price

Sqlfhv

modafinil and alcohol – provigil generic provigil weight loss

Iklzio

zithromax for sale – buy azithromycin azithromycin tablet

Dwtbyj

lasix side effects – where can i get furosemide furosemide 20 mg where to buy

Zbuilc

clomid online 100mg – buy clomid order clomid 100mg

Yqjbgk

average cost of cialis preion – mail order prescription drugs from canada over the counter tadalafil usa

RonaldVep

over the counter female viagra what if a woman takes viagra ViagraCND100Mg – buy viagra on line

Tifmzg

ivermectine online – where can i buy ivermectin ivermectin drug

Qhyrcv

casino gambling – casino online games online casino real money us

Aagdyi

natural ed pills – best ed pills non prescription erectile dysfunction treatment

FloydSkene

prednisone 10mg prednisone online – how to buy prednisone

RonaldPlene

buy stromectol online best price on ivermectin pills – ivermectin purchase

Bnmjoc

cialis pills 10mg – Buy cialis on line cialis 20 mg online

Wtjjgf

stromectol price – ivermectin australia ivermectin tablet

Vcinbd

ed pills comparison – ed clinic erectile dysfunction meaning

Qzyssa

ventolin price in india – buy ventolin ventolin inhalers

Kjtnic

buy cytotec no prescription – cytotec tablet 200mg buy cytotec pills online

Otdnjc

100mg doxycycline – order doxycycline doxycycline for sale uk

Lledyf

neurontin 100mg caps – order neurontin online buy levothyroxine online cheap

Gxbosk

pfizer viagra – 30 mg sildenafil buy online

Cialis

Generic Levaquin

web hosting an

Normally I don’t learn post on blogs, but I would like to say that
this write-up very pressured me to take a look at and do it!
Your writing taste has been amazed me. Thanks, quite great post.

Vcprkq

how to get tadalafil online – cialis 5mg daily where to get tadalafil

Bougwouff

http://buypropeciaon.com/ – buy generic propecia united states

http://t.co

Thanks for sharing your thoughts about my. Regards

buy finasteride 1mg

Nolvadex Package Insert

Wjwfkx

buy vardenafil price – vardenafil precio viagra vs cialis vs vardenafil

Affiliate Marketing

Wow, superb weblog layout! How long have you been running a blog for? you made blogging glance easy. The full look of your web site is magnificent, let alone the content material!

MauriceDen

ivermectin 90 mg ivermectin tablets – stromectol usa

t.co

Just want to say your article is as astonishing.
The clarity in your post is simply spectacular and
i could assume you are an expert on this subject. Fine with
your permission allow me to grab your RSS feed to keep up to date with forthcoming post.
Thanks a million and please keep up the enjoyable work.

Hypurc

ivermectin 20 mg – ivermectin 400 mg

when asmr

Please let me know if you’re looking for a writer for your weblog.

You have some really great posts and I believe I would be a good asset.
If you ever want to take some of the load off, I’d love
to write some content for your blog in exchange for a link back to mine.
Please blast me an email if interested. Thanks!

with scoliosis surgery

I pay a quick visit day-to-day some web sites and sites
to read articles, but this blog presents quality based writing.

Ranmia

prednisone 5 50mg tablet price – generic prednisone tablets prednisone 20 mg tablet

MauriceDen

ivermectin 3mg tablets price stromectol generic name – ivermectin price canada

this asmr

I need to to thank you for this good read!! I definitely enjoyed every little bit of it.
I have got you book marked to check out new things you post…

Uevedq

cheap accutane – accutane rx accutane online uk

asmr there

I’ll right away clutch your rss feed as I can’t to find your e-mail subscription hyperlink or
e-newsletter service. Do you’ve any? Please let me realize so that
I may just subscribe. Thanks.

and scoliosis surgery

I’m not sure exactly why but this weblog is loading incredibly
slow for me. Is anyone else having this issue or is it
a issue on my end? I’ll check back later and see if the problem still exists.

lasix 10 mg tablet price

furosemide 40 mg tablet prescription water pills lasix vot Glulp

buy female viagra online

viagra en ninos

lasix online no prescription

order lasix online furosemide 40 mg tablet vot Glulp

lasix 40 mg price

lasix prescription furosemide 12.5 mg walmart vot Glulp

quest bars where

This is really interesting, You are an overly skilled blogger.
I’ve joined your feed and stay up for in the hunt for more of your fantastic post.
Additionally, I’ve shared your site in my social networks quest bars http://tinyurl.com/49u8p8w7 quest bars

stromectol tablete

Purchase Propecia Drug

app.gumroad.com

Hello, i think that i saw you visited my website thus
i came to “return the favor”.I’m trying to find things to enhance my web
site!I suppose its ok to use a few of your ideas!!
asmr https://app.gumroad.com/asmr2021/p/best-asmr-online asmr

Vincze Andrea

I’d have to examine with you here. Which is not one thing I usually do! I take pleasure in reading a post that may make folks think. Additionally, thanks for permitting me to comment!

lasix 40 mg tablet price

furosemide rx furosemide price walmart vot Glulp

Rmjokl

how to buy stromectol – stromectol otc generic name for ivermectin

http://bitly.com/

I think this is one of the most vital information for me.
And i’m glad reading your article. But wanna remark on few general things, The web site style is great, the articles is really great : D.
Good job, cheers ps4 https://bit.ly/3z5HwTp ps4

j.mp

I’m gone to convey my little brother, that he should also go to see this
website on regular basis to get updated from newest news.
cheap flights http://1704milesapart.tumblr.com/ cheap flights

http://bit.ly/3yWVlmR

I think this is one of the most vital info for me. And i am glad reading your article.

But wanna remark on few general things, The site style is great, the articles is really nice :
D. Good job, cheers scoliosis surgery https://0401mm.tumblr.com/ scoliosis
surgery

Qkheey

where to buy prednisone online without a script – prednisone cost 5mg prednisone 6 mg

coub.com

Hey there! This is my first visit to your blog! We are a group of volunteers
and starting a new project in a community in the same niche.
Your blog provided us valuable information to work on. You have done a marvellous job!
scoliosis surgery https://coub.com/stories/962966-scoliosis-surgery scoliosis surgery

buy ivermectin nz

stromectol prices ivermectin uk coronavirus

Plaquenil

Forum Cialis 10mg Ou 20mg

purchase oral ivermectin

ivermectin cream stromectol xr

zithromax pediatric dose

precio cialis 10 mg farmacia

Fyaiiz

doxycycline nz cost – 500 mg doxycycline pill prednisolone 5mg

ivermectin over the counter

cost of stromectol medication buy stromectol pills

Ujowal

ivermectin 12 mg – ivermectin price comparison cost ivermectin

Leave a Reply

Your email address will not be published.