<blockquote>'So while I believe that the Fed should have normalized rates years ago, that the Fed should be systematically winding down the size of its balance sheet, and that the appropriate Fed Funds rate is well above current levels, I also believe that the economy is deteriorating to a much more significant extent than lagging variables, particularly employment, may suggest.
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..Still, to the extent that employment growth has done anything in recent years, the main impact has been to make labor scarce enough that wages have increased faster than the general price level. That outcome, in fact, is the only legitimate implication of what A.W. Phillips wrote about in 1950, and is now known as the “Phillips Curve.”
Wait. Wages? That’s not how they talked about the Phillips Curve in Economics 101, and it certainly isn’t how the Fed talks about the Phillips Curve. True. And it’s here that one has to make the distinction between data and dogma. See, Phillips studied a century of Britishwage data during a period when the U.K. was on the gold standard, when general prices were quite stable. So the wage inflation that Phillips observed during periods of low unemployment was actually
real wage inflation. Perhaps not surprisingly, it turns out that the
only Phillips Curve that one can actually demonstrate in empirical data is one that links unemployment to real wage inflation. When workers are relatively scarce, their wages increase relative to the general price level. In contrast, there’s utterly no evidence at all that central banks can somehow buy more employment by pursuing a higher level ofgeneral price inflation, no matter how adamant central bankers are in that pursuit. For more on this point, see
Eating Our Seed Corn: The Causes Of U.S. Economic Stagnation, And The Way Forward.
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Meanwhile, with a Federal Reserve meeting this week, we have to allow for greater volatility and uncertainty than usual. My view is that a systematic, measured, statistically-defined response to current output, employment and inflation conditions would place the Federal Funds rate close to 1.5% here, but those same conditions have been deteriorating on balance, despite a relatively low unemployment rate. The best reason to take another step toward normalizing policy has nothing to do with the real economy, and has everything to do with the fact that the Fed has created the third financial bubble since 2000. Unfortunately, if the Fed hopes to reduce the risk of another financial crash, that ship has already sailed. My sense is that the Fed will realize, much too late, that its last opportunity to avoid yet another speculative episode came and left port years ago. As in prior market cycles, the consequences will come. Then again, so will fresh investment opportunities as the current cycle is completed.'
- John P. Hussman, Ph.D.,
Support Drops Away, September 19, 2016</blockquote>
Context<Blockquote>
'..an extraordinary backdrop of markets set up for disappointment and dislocation.'</blockquote>