This week central bankers from around the world will be meeting in Jackson Hole. The conference has attracted a lot of attention over the years as both Alan Greenspan and Ben Bernanke have used the occasion to signal major shifts in policy.
We are now seven years into an economic recovery, the fourth longest economic expansion in history and the Fed has only managed a single rate hike. We are of the view that the Fed's job is done and that a continuation of ultra loose monetary policy could have harsh negative implications.
In our opinion, the preconditions for Fed interest-rate increases have expanded well beyond their Congressional mandate of maintaining price stability and maximizing employment and now include an improvement in the quality of new jobs; better wage growth; a meaningful acceleration in inflation, even beyond its stated goal of 2 percent; high equity prices and narrow credit spreads; and a stable geopolitical backdrop. Well, the Fed should stop waiting for everything to be perfect and should start the process of normalizing interest rates now.
First, economic growth isn't great, but it is generally in line with the pace since the end of the recession. True, GDP growth has averaged just under 1 percent over the past three quarter. However, consumer spending, which makes up nearly 70 percent of GDP, grew at a robust pace of 4.2 percent in the second quarter and averaged 2.7 percent over the past three quarters.
The GDP weakness we've seen in recent quarters has been mostly attributable to weak business investment, including huge inventory draw downs, and weak net exports. Most expect that inventory draw downs have now been exhausted and that business investment will benefit from impending fiscal stimulus (infrastructure spending, tax incentives and a lowering in the corporate tax rate) enacted by a new presidential administration and Congress.
The weak net exports in recent quarters, largely the result of a stronger dollar, will be transient, especially now that the dollar has stabilized. Outside of those troubled areas, current economic trends remain supportive of a return to economic growth of 2 percent+ in the third quarter. In any case, "acceptable economic growth" is not one of the Fed's mandates!