Ian Welsh | January 10 2017
As I noted before, the Fed and the Trump admin are on a collision course. More evidence:
Fed minutes show many officials think they may need to accelerate rate hikes if fiscal raises demand over sustainable levels
— Sam Fleming (FT) (@Sam1Fleming) January 4, 2017
The Fed’s argument is that the unemployment rate is low enough that it is at the natural rate of employment which doesn’t cause wage-push inflation. As of December, that was 4.7%. (There are tons of problems with this, but we’ll ignore most of them, what matters is what the Fed thinks.)
I am old enough to remember when an unemployment rate of 5% was considered a scandal, but no matter.
The fact is that the people who elected Trump aren’t feeling good. To make them feel good Trump is going to have get the official unemployment rate lower than it is now, at least under 4%, and hopefully to 3% or lower and hold it there for some time, at least 2 or 3 years.
This stuff takes time to ripple thru the economy, and it takes time for a tight labor market to push employers both to raise wages and to hire people who they consider marginal.
If the Federal Reserve raises rates if Trump’s policies (“fiscal”, in the above) start to work, they will be making sure he can’t deliver to his constituency.
This is a direct collision course.
Now let me say something simple. The Federal Reserve, for over 30 years, has deliberately crushed wages. This was policy. Policy.