To receive weekly insights and a filtered lens on macroeconomic and financial market analysis
Stephen Williamson, from the University of Western Ontario, dissects the Fed’s explanations for their interest rate cut. He finds them all insufficient. The labour market is holding up to last year’s records when it was tighter than it had ever been (as measured by the ratio of job openings to the number of unemployed). Similar to global trends, Home GDP growth has been smooth in the past 10 years, with unemployment rates consistently falling in Japan, the Eurozone, and the UK. Chair Powell’s claims about lower investment levels aren’t supported by the data either. Williamson then moves on to inflation, which he does agree is below target, at 1.6%, and if one believes in the Philips Curve (he doesn’t), the rate cut seems logical. However, he shows that the curve is currently flat and with the labor market capacity already stretched, inflation won’t see much of an impact.
Why does this matter? Williamson joins a large number of people struggling to justify the Fed’s move. The world won’t end, but Powell might have lost the reputation he enjoyed in his early days as a Chair. Academics, in particular, are turning their eyes to the Japan experience, as we discussed last week, expecting inflation to remain below 2% long term despite lower rates.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)