When the US Federal Reserve says there’s a slack in the economy, it means lack of activity in the labor market and an unemployment rate higher than where it should be to generate sufficient inflation, said Neil Dutta, head of US Macroeconomics at Renaissance Macro Research.
There have been both optimistic and pessimistic opinions about the state of the economy. Asked which part of the economy matters most, Neil said the labor market trumps all else. The first quarter of this year was a throw away and economists might be downgrading Q1 for all sorts of technical reasons.
The earnings numbers show productivity didn’t collapse in the first quarter. At the end of the day, generating more than 200,000 monthly jobs is an achievement. The GDP data is noisy and will be subjected to multiple revisions. If the job growth continues at current pace, it’ll be a matter of time before wages pick up, he noted.
In the past 12 months, monthly nonfarm job payrolls have topped 200,000 60 percent of the time. Asked why it is significant, Neil said the economy is currently running job numbers that are higher than the last cycle though the Wall Street has been unkind about it.
Admittedly the economy came out of a deeper hole, but it will be wrong to say there has been no acceleration. At 215,000 new jobs every month, it’s an improvement from last year’s 190,000. While this shows a clear pattern, the Fed’s monetary policy is actually getting more accommodative. St. Louis Federal Reserve Bank president Jim Bullard correctly said recently that the Fed is closer to its goals than anytime in the past five years.
Asked to explain the policy differences of the US and Japan, Neil said early in the financial crisis, US policymakers put both their feet on the accelerator in a way that Japan never did. That initial response led to profound policy differences. US labor market adjustment was much more rapid than Japan, which helped boost corporate profits and sort of restore confidence.
Asset prices got a boost because corporate profits rose. Also, there have been signs of inflation and lending picking up in the US. So, for a variety of reasons the US differed from Japan though the most significant difference remains the speed with which policymakers responded after 2008, he observed.
Asked if any new announcement could be expected from Fed Chair Janet Yellen when policymakers meet on June 18, Neil said markets would expect Yellen to spell out her stand on the labor market and whether she thinks the unemployment rate is still a viable indicator (for the economy).
Asked if the US nominal GDP will reflect the revival of the so-called “animal spirit” (in the words of John Maynard Keynes), Neil said it was already reflected in the second half of 2013 when nominal GDP exceeded 5 percent. The first quarter (of 2014) was a throwaway, but the employment numbers that came out were consistent with a nominal GDP growth rate of 5 percent, he argued.
Asked how the bond and the stock market would react to 5 percent growth, Neil said a re-pricing will take place and 10-year Treasury yields are likely to breach the 3 percent mark by this time next year. The Fed will probably raise interest rates because they are comfortable with the state of the world, which, in turn, is positive for risk capital, he concluded.
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