To start this off, I am asking an honest question regarding the meaning of David Beckworth’s new post on why the Fed will raise interest rates this year. In it, Beckworth presents data on rising household nominal income expectations and realized employment costs, but doesn’t tie it in with anything that says “This is why.” I understand what he’s saying, but at the same time I don’t understand it in terms that lead to indications of rate hikes; the golden thread of logic definitively connecting it all is missing. There isn’t anything there that, to me, says the Fed *should* raise interest rates.
I have been a frequent critic of FOMC statements. But the last one contained this bit of information that seems relevant:
The pace of job gains moderated, and the unemployment rate remained steady. A range of labor market indicators suggests that underutilization of labor resources was little changed. Growth in household spending declined; households’ real incomes rose strongly, partly reflecting earlier declines in energy prices, and consumer sentiment remains high.
Part of my confusion here might be between realized real income and nominal income expectations. But the nominal income expectations data is survey-based, rather than market-based aggregate income expectations that is then compared to realized employment costs. Thus, it seems to me, that the entire rationale in the post is based on a marriage of convenience between expectations of rising nominal incomes and rising realized nominal employment costs. This particular rate hike rationale isn’t so much about expectations of nominal income is rising, but rather it *appears* to be correlated to rising employment costs.
There are at least two problems here. One is that employment costs are inclusive of taxes and compliance costs, and perhaps other things (there isn’t a breakdown of what is included in the data) that do not translate directly into the paychecks of workers. Recent indicators of realized wage growth, to compare apples to apples, have been less than modest. The other is that real incomes are rising, according to the Fed, as a result of lower energy prices; and people feel better off which may add an element of noise to survey results. An additional problem is that also, according to the Fed, there is still slack in the labor market.
I am not completely positive but it seems that this sort of argument ventures into the territory of mixing elements of detail with macro, getting much farther into details than is required for the purposes of macro policy formation.
Beckworth doesn’t say that he agrees or disagrees with this rationale, only that this is why the Fed is contemplating a rate hike. Perhaps he is leaving it to people like me to do with it what we must; so, any criticism of it here is surely not directed toward him. And in doing with this information what I must, I have to say that I’m appalled at the suggestion that it’s the Fed’s job react to supply shocks (inversely, even) in order to keep a lid on employment costs – especially based on apples to oranges comparison, or in reality, nothing but conjecture. Perhaps those at the Fed might believe it is a value-add function of its duties, but I don’t recall reading in the mandates that it shall maintain slack in the labor force to keep a lid on employment costs, which is what all of this really boils down to – after it defined its objectives in terms of an inflation target.
I agree with almost nothing that has to do with IT. If I were inclined to accept it, however, I certainly wouldn’t agree that a 2% ceiling on headline PCE is an appropriate approach. But current monetary policy formation has moved way away from anything resembling structure based on macro theory including the admonition of targeting variables that do not represent controllable nominal aggregates, with employment costs being one of those, as to appear as confused and subject to arbitrary whims. It’s worse than IT, and I wouldn’t be surprised if five years from now, the last two years appear to have been some our better days.