By Design, the Fed May Be Tightening Too Much

Link: https://www.wsj.com/amp/articles/by-design-the-fed-may-be-tightening-too-much-11655370001

Excerpt:

The Fed has often moved interest rates by 0.75 percentage point or more in recent decades. But until this week, it had always done so in a downward direction. Indeed, it was a hallmark of Fed policy that it always cut interest rates faster, with less prompting, than it raised them.

…..

This asymmetry reflected the Fed’s perception of risks. If it cut rates too little, the economy might spiral down and the financial system implode. If it cut them too much, inflation might, some years later, rise. Throughout this prepandemic period, inflation was low and, at times, too low, but that wasn’t a big deal. Moreover, during that low-inflation, low-interest-rate era, rates couldn’t fall very much — the Fed called this the “zero lower bound” — so best to act quickly to forestall a downward spiral. If inflation was a problem, there was no limit to how high rates could go.

This philosophy got taken too far. The Fed kept rates too low for too long last year (and the Biden administration enacted too much fiscal stimulus) out of a mistaken belief that inflation was a remote threat compared with prolonged high unemployment.

The result is that risks are now asymmetric in the other direction. Inflation is too high and a self-sustaining wage-price spiral is a real threat. Asked why, after carefully laying the groundwork for a half-point increase, the Fed raised rates by 0.75 point Wednesday, Mr. Powell pointed to an “eye-catching” report that showed long-term inflation expectations rising ominously.

Author(s): Greg Ip

Publication Date: 16 Jun 2022

Publication Site: WSJ

Covid-19, Endemic or Not, Will Still Make Us Poorer

Link: https://www.wsj.com/articles/covid-19-endemic-or-not-will-still-make-us-poorer-11642608213

Excerpt:

Endemic Covid-19 could thus become a lasting “supply shock” that degrades how much economies can produce, similar to the surge in oil prices in the 1970s. In October, the International Monetary Fund estimated global output this year would still be 3% lower than it had projected in 2019, with Western Europe and Latin America showing much bigger hits than China and Japan, where Covid-19’s toll has been much lower.

The U.S. is an exception: Output in the last quarter of 2021 was roughly back to its pre-pandemic trend. But the economy, distorted and disrupted by Covid-19, is struggling to sustain this level of output, as the surge in inflation to 7% demonstrates.

Covid-19 might have boosted efficiency in some industries by speeding up digitization and adoption of remote work. Goldman Sachs economists estimate this delivered a 3% to 4% boost to U.S. productivity.

But some of the shift to remote operations is involuntary, and some of the rise in productivity might reflect an overworked workforce. Indeed, the pandemic has left the labor force smaller, sicker and less happy. Absences due to illness among employed workers have averaged 50% higher in the last two years. In early January, nearly 12 million people weren’t working because they were sick with Covid-19, caring for someone with coronavirus, or concerned about getting or spreading the disease, according to a regular Census Bureau survey. The figure hasn’t been below 4 million since June 2020.

In the past year, workers have reported declining satisfaction with their wages and a rising “reservation wage,” that is, how much they would have to be paid to accept a new job, according to the Federal Reserve Bank of New York. This might reflect inflation, changed expectations, or stress due to Covid-19 testing, masks and vaccine mandates, or their absence.

For employers, this makes it much harder to attract the necessary staff. Nursing homes have boosted hourly wages 14% since the start of the pandemic, yet staffing has plummeted 12%, impairing their ability to accept new patients. Such shortages impose a cost that doesn’t show up in gross domestic product.

Author(s): Greg Ip

Publication Date: 19 Jan 2022

Publication Site: WSJ

As World Runs Short of Workers, a Boost for Wages—and Inflation

Link: https://www.wsj.com/articles/as-world-runs-short-of-workers-a-boost-for-wagesand-inflation-11620824675

Graphic:

Excerpt:

The U.S. population grew 7% between 2010 and 2020, according to census results. The age breakdown isn’t yet available, but a smaller sample by the Census Bureau and the Bureau of Labor Statistics shows that the working-age population — those 16 to 64 — grew just 3.3%. Because the share of those people working or looking for work has shrunk, the working-age labor force grew only 2%, and actually shrank last year. Some of those missing workers will return when the virus recedes. But many won’t: Baby boomer retirements have soared.

Reversing this move would require either a dramatic increase in births, which has eluded countries with more-family-friendly policies, or immigration, which is politically hard.

The demographic squeeze is far more severe in China, which admits almost no immigrants and for years limited families to one child. Tuesday, authorities said the population in China had grown just 5.4% in the past decade. The working-age population — those 15 to 59 — shrank 5%, or roughly 45 million people. When worker shortages began emerging over a decade ago, factories began moving to poorer inland provinces and then cheaper countries including Vietnam. In recent years some indicators suggest jobs are getting harder to fill, though the data might not be nationally representative.

Author(s): Greg Ip

Publication Date: 12 May 2021

Publication Site: Wall Street Journal