Tuesday, April 5, 2011

Tim Duy: Fed Unlikely to Tighten

Tim Duy of Fed Watch doesn't think that Bernanke's Fed will be tightening anytime soon, in spite of what some members of the FOMC may be signaling:

"Likewise, the employment to population ratio shows no indication of rebounding to prerecession levels anytime soon. At this rate of recovery, I am generally worried that the next decade will prove to be once again “jobless,” that nonfarm payrolls will once again remain stagnant by the time we are near the trough of the next recession. Maybe this is what inevitably becomes of aging economies.

"The palpable weakness of the labor market reveals itself in stagnant wage growth. Average hourly earnings gained just a penny in February, and nothing in March. Workers might be feeling the effect of headline inflation, but apparently have absolutely no power to respond with anything but belt tightening. The lack of wage growth is simply the biggest hole in the inflation story, as it suggests that underlying inflation inertia is practically nonexistent. That this is not obvious to all monetary policymakers is somewhat shocking.


"Finally, we need to consider the likely position of Federal Reserve Chairman Ben Bernanke. It is difficult to believe that an academic so knowledgeable about the history of the Great Depression would be eager to repeat the mistakes of 1937. Nor would he be likely to confuse a change in relative prices with an outbreak of accelerating inflation. Nor would he fail to recognize the importance of wages in setting in motion accelerating inflation. Nor would he ignore the depth of the labor market hole. And, I would hope, that he is already beginning to see the possibility of another jobless decade unless we can quickly and definitively surpass the previous employment peak (never too early to think about the outcome of the next recession, even while riding the current wave upward). All of which suggests he will not be leading the charge toward tightening anytime soon.

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