The NAFCU Journal November-December 2019 - 8

THE BOTTOM LINE

Feeling the Heat:
The Fed's Search for Inflation
By Curt Long

W

e are officially in the
midst of the longest U.S.
economic expansion in
history. Beyond its durability, the recovery has been highlighted
by a number of achievements, such as a
sub-4 percent unemployment rate and a
booming stock market. Yet most economists believe that the recovery has been
a tepid one, in which real GDP growth
has generally failed to break 3 percent
and wage growth has been muted. Many
observers are now blaming the Federal
Reserve for committing its hallmark sin
of raising rates too soon and too quickly,
squelching growth in the process.

Inflation underlies these claims. The Fed
aims for year-over-year inflation of 2
percent, yet only on two brief occasions
over the past 10 years has it achieved
that target. At the Fed's annual August
seminar in Jackson Hole, Wyo., Chairman Jerome Powell stated that "low
inflation has been the main concern for
the past decade." Critics, including some
members of the Federal Open Market
Committee, which sets the Fed's monetary policy, assert that the committee
has treated the 2 percent target as a
ceiling. As inflation starts to approach
its target, the committee tightens policy
prematurely, which has caused consistent
downside misses in price growth. Many
who hold this view would say that the
relationship between resource utilization and inflation has weakened, yet the
Fed has been slow to pick up on it. If
true, policymakers have substantially
greater latitude to maintain low rates and
stimulate growth without risking a rise
in prices.
8

CONTRIBUTIONS TO CORE PCE INFLATION

A different view of inflation is laid out in
the June 2019 research paper "Slack and
Cyclically Sensitive Inflation" by James
Stock of Harvard and Mark Watson of
Princeton. The pair disaggregates the
components of inflation into those that
are historically sensitive to the business
cycle (or "cyclical") and those that are
not ("acyclical"). The researchers theorize
that a leading cause for acyclical inflation
is that some products are either priced
in global markets (such as commodities)
or have prices that are difficult to measure (such as financial services). A 2017
study by the Federal Reserve Bank of San
Francisco highlighted the role of health
care costs, which are often negotiated
by health care providers and subject to
legislative actions. Each study finds that
acyclical elements account for roughly
half of overall measures of inflation.
If these findings are valid, and if policymakers are searching for the amount
of "heat" generated by the economy in
the form of price pressures, the cyclical
elements are most relevant. The accompanying chart, published by the Federal
Reserve Bank of San Francisco, shows a
disaggregation of year-over-year inflation
into cyclical and acyclical components.

Since each accounts for roughly half
of the overall basket of goods in the
consumption expenditures index, a 1
percentage point contribution to overall
inflation from cyclical components is consistent with 2 percent overall inflation, on
average. Over the decade-long expansion,
cyclical inflation has met or exceeded this
mark in 80 months, while acyclical inflation has done so in only 11 months. The
shortfall in inflation, therefore, appears
to be largely the result of noneconomic
factors impacting those acyclical elements.
The title of this year's Jackson Hole symposium was "Challenges for Monetary
Policy," and the topics of many of the
presentations focused on the inability of
central bankers to achieve employment
and inflation mandates using their traditional toolbox. Some are even wondering
whether the entire interest-rate targeting
framework needs to be scrapped. Yet it
may be that the Fed has been able to produce enough heat to meet both sides of
its dual mandate, even if it hasn't felt like
it. Maybe they just have their hands in the
wrong place.
Curt Long is NAFCU's chief economist and
vice president of research.

THE NAFCU JOURNAL  NOVEMBER-DECEMBER 2019



The NAFCU Journal November-December 2019

Table of Contents for the Digital Edition of The NAFCU Journal November-December 2019

The NAFCU Journal November-December 2019
Contents
Conferences
From the Chair
Washington and Industry Briefs
The Bottom Line
Welcome, New Members
Leading the Charge
Test for Success
Test for Success
Executive Spotlight
Management Insight
Compliance Central
Inside NAFCU Services
From the President’s Desk
The NAFCU Journal November-December 2019 - The NAFCU Journal November-December 2019
The NAFCU Journal November-December 2019 - Cover2
The NAFCU Journal November-December 2019 - Contents
The NAFCU Journal November-December 2019 - 2
The NAFCU Journal November-December 2019 - Conferences
The NAFCU Journal November-December 2019 - From the Chair
The NAFCU Journal November-December 2019 - 5
The NAFCU Journal November-December 2019 - Washington and Industry Briefs
The NAFCU Journal November-December 2019 - 7
The NAFCU Journal November-December 2019 - The Bottom Line
The NAFCU Journal November-December 2019 - 9
The NAFCU Journal November-December 2019 - 10
The NAFCU Journal November-December 2019 - 11
The NAFCU Journal November-December 2019 - 12
The NAFCU Journal November-December 2019 - Welcome, New Members
The NAFCU Journal November-December 2019 - 14
The NAFCU Journal November-December 2019 - 15
The NAFCU Journal November-December 2019 - 16
The NAFCU Journal November-December 2019 - 17
The NAFCU Journal November-December 2019 - Leading the Charge
The NAFCU Journal November-December 2019 - 19
The NAFCU Journal November-December 2019 - 20
The NAFCU Journal November-December 2019 - 21
The NAFCU Journal November-December 2019 - 22
The NAFCU Journal November-December 2019 - 23
The NAFCU Journal November-December 2019 - 24
The NAFCU Journal November-December 2019 - 25
The NAFCU Journal November-December 2019 - Test for Success
The NAFCU Journal November-December 2019 - 27
The NAFCU Journal November-December 2019 - 28
The NAFCU Journal November-December 2019 - 29
The NAFCU Journal November-December 2019 - 30
The NAFCU Journal November-December 2019 - 31
The NAFCU Journal November-December 2019 - Test for Success
The NAFCU Journal November-December 2019 - 33
The NAFCU Journal November-December 2019 - 34
The NAFCU Journal November-December 2019 - 35
The NAFCU Journal November-December 2019 - 36
The NAFCU Journal November-December 2019 - 37
The NAFCU Journal November-December 2019 - 38
The NAFCU Journal November-December 2019 - 39
The NAFCU Journal November-December 2019 - Executive Spotlight
The NAFCU Journal November-December 2019 - 41
The NAFCU Journal November-December 2019 - Management Insight
The NAFCU Journal November-December 2019 - 43
The NAFCU Journal November-December 2019 - Compliance Central
The NAFCU Journal November-December 2019 - 45
The NAFCU Journal November-December 2019 - Inside NAFCU Services
The NAFCU Journal November-December 2019 - 47
The NAFCU Journal November-December 2019 - From the President’s Desk
The NAFCU Journal November-December 2019 - Cover3
The NAFCU Journal November-December 2019 - Cover4
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