As this is a note on U.S. monetary policies, it is perhaps fitting to begin with an apparently lost Wall Street art of"Fed-watching."
Between January and the last reserves report on March 13, the Fed raised its asset holdings by $61.7 billion, while still leaving the high-powered money 9.7 percent below its level from a year earlier. That is a typical case where a forecast crucially depends on unpredictable political and security considerations affecting the foreign sources of the supply chain. Output decisions of a fractious oil cartel, and its associates, are hard to assess now with social unrest in Venezuela, Iran sanctions and increasingly hostile U.S. relations with China and Russia.
And all that is happening in a fully-employed U.S. economy growing at a rate of 3 percent, a pace of advance that is an entire percentage point above the estimated non-inflationary growth potential of 2 percent. That potential is a physical limit to non-inflationary growth set by the stock and quality of human and capital.
Trade tensions with China are another concern, presumably because Wall Street fears that a possible loss of American $120.3 billion exports to China recorded last year – 0.6 percent of U.S. GDP — would devastate the U.S. economy. Ridiculous, isn't it?There, however, is one problem with trade that is not getting the attention it deserves.
The resulting upward price pressures in a fully-employed economy would leave no choice to the Fed: Interest rates would have to go up.
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