>>4359861
Maybe the answer is in the editorial. Here is the rest of it:
What to do? The right answer is to ignore the politics, inside and outside the Fed, and follow the signals that suggest a prudent pause in raising rates at this week’s Open Market Committee (FOMC) meeting. Get the monetary policy that best serves the economy, and the politics will work itself out. Get the policy wrong, and Mr. Trump will be the least of Mr. Powell’s political worries.
The case for pausing in its interest-rate march back to “normal” starts with the Fed’s mandate to control prices with low unemployment. There’s simply no sign of an inflation breakout.
The Fed’s favorite inflation measure, the PCE deflator, has been falling for months. The dollar is strong, both against gold and the world’s other major currencies. Gold sold for about $1,250 an ounce on Monday but six months ago it was about $1,300. Other commodity prices that are often inflation canaries, such as oil and farm products, are also down.
This is all in sharp contrast to the 2003-2005 period when the Alan Greenspan-Ben Bernanke Fed kept rates too low for too long. Then commodity prices like oil were rising sharply, and housing prices exploded.
Wages have begun to rise in a tight labor market, with average hourly earnings rising at an annual rate of 3.1%. But this is what you’d expect in a healthy labor market that is adding about 170,000 new jobs a month and a jobless rate at a historic low of 3.7%.
There is also no sign of the “cost-push” wage inflation that the Fed staff so often frets about. Recall that by previous Fed calculations the economy had reached full employment two or three years ago. Yet stronger growth continues to pull more Americans into the job market. As Fed Vice Chairman Richard Clarida recently noted, productivity is rising at a 1.8% rate, which suggests further room for non-inflationary wage gains.
Meanwhile, U.S. growth may be slowing. The Atlanta Fed now predicts 3% growth for the fourth quarter, which would mean the first calendar year of growth exceeding 3% since 2005. But the world economy has notably slowed, with warning signs in China and Europe in particular. The uncertainty introduced by Mr. Trump’s tariff battles have reduced trade flows and dampened investment. Housing and autos, both sensitive to interest-rate increases, are down. And a few cracks are showing in credit markets, especially high-yield bonds.
The larger argument for a pause is that the Fed is unwinding the largest monetary experiment in modern history. Central banks around the world are moving away from multi-trillion-dollar bond purchases and zero-interest rates, and they’re doing it without a road map. What is the “normal” interest rate in this post-crisis world? We don’t know, and we doubt the Fed does either.
If quantitative easing lifted risk-asset prices, then what happens amid quantitative tightening? Stanley Druckenmiller and Kevin Warsh posed that question on these pages Monday, and the answer may explain some of the stock market’s doldrums this year despite the strong economy and solid corporate earnings.
Mr. Powell recently gave a fine speech pointing out the Fed’s fallibility in previous eras—a marked contrast to the all-knowing condescension of the Bernanke and Greenspan years. If the Fed is walking in a dark room with sunglasses as it navigates quantitative tightening, then it makes sense to walk slowly. The Fed can always revisit its pause next year if the economy shows continued resilience or Mr. Trump and China agree to a trade deal.
A pause would conflict with previous Fed guidance and the famous “plot points” of FOMC members for future rate expectations. But the FOMC also claims to be “data dependent,” and if that’s true, it should follow the data. Some of our friends fret that if the Fed stops now, it will never get back to normal. But it will surely never do so if there’s a near-term recession. The best way to normalize is to keep the expansion going as long as possible without inflation.
As for Mr. Trump, Mr. Powell can defend a pause on the merits and say explicitly that the President had no influence. Here’s one way to put it when he’s asked the inevitable question at his press conference:
“Yes, I’ve seen the President’s comments, but the Federal Reserve is an independent central bank. His comments make our job harder because they might cause some investors to think we make decisions based on political pressure. I can assure you that we make our decisions on the economic merits. Some may choose not to believe that, but they do so at their own risk.”
That won’t stop Mr. Trump, but it would help the Fed’s credibility with markets.