- 2018-10-08
Powell's economic proposition
Janet Yellen (Janet Yellen) has completed her term as chairman of the Federal Reserve (Fed), the unemployment rate at this time is much lower than when she took office, inflation remains low and closer to the target, the capital situation of the financial system Better and more liquidity. Can people have more demands on the chairman of the Federal Reserve?
Yellen's success fully reflects her judgment and careful thinking. But very importantly, just like Alan Greenspan in the 1990s, she quickly realized the major structural changes in the economy and adjusted policies accordingly instead of following the traditional model. The structural change Greenspan perceives is the acceleration of productivity growth, while Yellen’s discovery is the decline in the "neutral rate of interest." The so-called neutral interest rate refers to the level of interest rates at which savings and investment balance and economic growth is neither accelerated nor decelerated significantly.
In 2014, when Yellen assumed the chairmanship of the Fed, whether within the Fed or elsewhere, the prevailing view was that although interest rates were very low, economic growth was slow. Temporary factors that quickly faded. When the headwinds recede, the economy is likely to achieve sustained growth at a "normal" federal funds rate of 4%. According to this view, a policy with interest rates close to zero is highly expansionary and may cause dangerous inflation.
In 2014, after a five-year restoration period for the financial system, the above-mentioned headwind theory lost its credibility. Estimates of the neutral interest rate are beginning to show that it has been in a downward trend for a long time. To put it more simply, although interest rates have remained close to zero and the financial repair process has been completed as measured by credit spreads in 2009, economic growth is still very slow. So I reintroduced the "Long Term Economic Stagnation Theory": Except when there is excessive behavior in the financial sector, the economy is likely to be hit by more savings than investment, and it is prone to stagnant growth and low inflation.
Yellen did not agree with the theory of long-term stagnation. Under her leadership, the Fed gradually came to a firm view that neutral interest rates had fallen sharply, and concluded that policy expansion is not as strong as people generally believe. Her intuition has proved it, and may even appear to be a little too cautious, because during her tenure, economic growth and inflation have generally not met the Fed’s expectations-even when interest rates are lower than expected and the federal deficit grows more than expected. under.
Fortunately for the American economy, Yellen has seen changes in the economic structure and has not followed models and policy rules based on historical experience. If she follows such a model, we are likely to be in recession now. But it must be admitted that if the stock market does not rise at an obviously abnormal rate, and if the growth of borrowing does not far exceed the growth of income, the economic growth in the low interest rate environment in recent years will not be so strong.
Therefore, the first challenge facing the respected Jay Powell as chairman of the Federal Reserve is to figure out how to achieve sufficiently strong and financially sustainable economic growth. Even if interest rates remain at a very low level, the normal level of private savings in the United States continues to exceed the normal level of private investment by a large margin.
The inflow of foreign capital will magnify this gap. This will result in a deflationary trend-which can only be offset by budget deficits or artificially curbing savings and financial conditions that promote investment.
The rise in asset values and borrowing levels cannot exceed the growth rate of gross domestic product (GDP) indefinitely, although their ability to maintain this status for a period of time contributed to the economic success of the past few years.
If the Fed raises interest rates sufficiently to ensure financial stability, economic growth may slow down too much. If the Fed focuses on maintaining the economic growth required to achieve the inflation target, it may cause the leverage ratio and asset prices to rise further, laying hidden dangers in the future.
This is a very difficult balance to achieve. Except for the period after the previous recessions, it has been a long time since the US economy achieved good growth with a stable financial foundation. History will judge the stability of financial conditions in recent years.
Before that, we were in a period of recovery from the 2008-09 recession. Going back is a period of financial excesses in housing and other markets. Ahead is the 2001 recession and recovery, and even earlier is the Internet and stock market bubbles of the late 1990s.
Therefore, it has been a generation since the US economy achieved that kind of stable, financially sustainable and strong growth. Good luck to the new chairman.