It’s a strange time: Since the government bailout of Wall Street nine years ago, U.S. central bankers have gotten used to being fussed over like fascinating party guests, a bemused Patrick Harker, the ex-Wharton dean, economist, and engineer who heads the Federal Reserve Bank of Philadelphia, told a New York audience last week.
“Now we’re headed back to the natural state of things” — which is to say, “boring” — where private-sector people will “try to avoid getting stuck next to us at dinner,” Harker said.
Maybe that’s wishful thinking. Or maybe he’s right, and the slow, steady recovery, or the distractions of the Trump presidency, will help the Fed return to its old way of business quietly, avoiding the kind of beatdown that Trump and populists from both parties threatened in last year’s election campaign.
The central bank has finally started its slow effort to regain leverage over the economy, not just by boosting interest rates, but also by selling off the vast reserve of government and mortgage debt it amassed to prop up the debt markets — “quantitative easing.”
The Fed Open Market Committee last week disclosed that it had given the go-ahead to the great Fed debt melt-off at its last meeting, May 3 (there’s a three-week delay in making these things public, so members clean up their notes).
“Under the proposed plan” to “shrink its balance sheet,” the Fed plans to cut its purchases of new bonds as old ones expire every month, “until the balance sheet is normalized,” concludes a review of the policy by Nariman Behravesh and colleagues at IHS Markit, the London-based consulting firm that includes the former Wharton Econometrics.
How fat is the Fed? The central bank has $4.5 trillion on its books, much of it in mortgage-backed securities. That’s five times the $900 billion, mostly short-term Treasuries, on the balance sheet before the crisis, Harker noted. “As the economy continues its march toward normal,” it will be easier for the Fed to slim down.
And why does the Fed want to reverse its policies of the last decade, by boosting interest rates and letting its bonds go away? So when the economy stalls again, the Fed will be able to employ the weapons it knows best: cutting rates, and buying up debt. It must have both “in the arsenal in case we need to use them again,” Harker said.
You can’t make money cheaper, to get people spending again, if you’re already practically giving it away, as the Fed and banks have been — at least to people with good credit — since the recession.
And you can’t affect demand for credit, as the Fed tried to do by buying up all those bonds, if you already own most of the available supply.
Which brings us to the Trump budget. The president wants to cut taxes a lot, and spending a little — while insisting 3 percent-plus yearly growth will boost overall tax collections and dig us out of the resulting deficit hole.
Harker didn’t directly contradict Trump but did point out that U.S. growth has been below 2 percent since the recession for reasons that include the much slower growth of the U.S. workforce, which limits demand. Americans have raised fewer children, welcomed fewer immigrants, and let more adults stay home, in part by applying for expanded disability benefits.
But didn’t the U.S. economy used to grow by a steady 3 to 4 percent a year? It did — from 1950-2000, Harker said.
But half that growth “came from the expansion of the American workforce.” Now we’re looking at fewer new workers, and more old and disabled people, and relying on the remaining workers to pay higher health-care and retirement costs. Of course, the result is slower growth.
“If we expect our economy to expand, we need people to do the jobs we have now and the ones that are coming in the future,” Harker added. We need to train more skilled tech-competent workers, not just engineers or programmers, but also people who can perform smartphone-based personal, customer, security, and order-fulfillment service jobs. Or bring them in as immigrants.
“Fundamentally, we need more people,” Harker concluded. “That’s how we get more growth.”