Innovation Symposium 2016: The Fed and the Economy

Paradigm − October 19, 2016 − filed under Events

7H2A6180Susan Collins, PhD, dean of public policy at the University of Michigan’s Ford School of Public and board member of the Federal Reserve Bank of Chicago, surprised attendees at Paradigm Outcomes’ Innovation Symposium by revealing one of the Fed’s biggest secrets. It was about how the Fed communicates to Americans. She said that “Fed-speak” used to be about making sure people didn’t actually understand what it said.

Collins smiled. “Former Fed Chairman Alan Greenspan once said, ‘If you actually understood my answer, then I didn’t say it correctly.’”

She explained that for a while they’ve let the transparency horse out of the barn. “But it’s going back in,” she said. “You really have to weigh the pros and cons of a policy change or not. You don’t want to hear people speaking from a common voice. That would mean you didn’t have a range of views around the table. The expectation should be that it’s going to be confusing.”

That revelation was just one of many insightful observations that Dr. Collins offered in her review of the post-recession economy, the “will-they-or-won’t-they-raise-interest-rates” debate, the labor market, inflation and the global economy in general.

Short-Term vs. Long-Term Solutions and the “New Normal”

In regard to the recovering economy, she said that it’s a big challenge for the Fed to maintain that recovery and build upon it, but it’s a complicated problem. There’s still a lot of uncertainty and there’s a lot of data to review. In fact, in her opinion, there is actually too much data to filter through.

Dr. Collins presented a number of charts highlighting the recovery. A self-proclaimed “glass-half-full optimist,” she showed just how far we’ve come from the depths of the 2009 great recession. She did point out, though, that the estimates of the potential growth of the economy have slowed. She spoke of the short-term success of the Federal Reserve and how it played a major role through smart monetary policy of pulling the U.S. and global economies out of the recession.

“In my view, that’s seen as a more urgent need, but not as urgent as some people think,” she said. “In my opinion, we’re not focusing as much on some of the important things that are underlying long-term economic growth.”

Those important things include the challenges in productivity. She illustrated how long-term average productivity is really volatile. Since the 2009 recession, productivity levels have actually fallen and the forecast is that it’s not going to be increasing.

“We’re still focusing too much on short-term things like whether the Fed raises interest rates a quarter percentage point next period or not,” Collins said.

She went on to say there was a lot of good news in the labor markets. Long-term unemployment rates have come down. But her biggest concern was that there are fewer people working. For instance, the percentage of women in the labor force has begun to decline.

“Inflation is a lot more problematic,” she said. “Why is it so low and so stubborn? Historically, the challenge has always been to fight high inflation. No one believes that anymore.”

Collins explained that sometimes you have to create a slowdown in the economy to bring inflation down. “We know how to do that. We know how to fight inflation.”

She believes, though, that the risks of waiting and letting inflation creep up are lower than the risks of moving a little too quickly. She showed that an economy doesn’t work as well when inflation is low, so managing that inflation is very much the Fed’s key focus these days.

“I think the general public doesn’t understand why low inflation is such a big deal. There are good reasons to really be concerned about it. Right now the Fed is weighing the risks of raising interest rates to deal with inflation. Do you go too soon or do you go too late?”

Like everything, it comes down to risk versus reward. What she called the “new normal” for the Federal Reserve. And all of us.

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