Federal Reserve Surveillance: Supply Drives the Economy

Over the previous two years, I’ve written increasingly about how provide within the economic system is the driving power behind financial progress.

why?

Nicely, I attempted to clarify this phenomenon in a latest submit.

The argument goes right here. Technological change appears to be the true driving power behind the US economic system lately.

Technological change is determined by innovators, each within the enterprise world and in academia, and innovators, constructing a “new” world, reply to conditions during which they consider progress will be made.

Demand could not even exist for “new” services and products on the time the “new” ones are created and dropped at market.

Furthermore, many “new” merchandise are dropped at market primarily based on company “time allocation” methods and have little to do with the place the demand is. the time when a company brings a product to market.

So it seems that the availability facet of the economic system is producing many of the progress lately.

And the way was the contribution of the proposal proven?

The proposal was manifested within the additional progress of labor productiveness.

Within the following graph, we see how labor productiveness has grown because the finish of the Nice Recession in 2009.

From the tip of the Nice Recession to the beginning of the Little Recession in 2020, the cumulative price of labor productiveness progress was 2.1 p.c.

One can see all of the disruptions that occurred in the course of the COVID-19 pandemic and the next recession, however one can even see that productiveness progress continued into the a long time of the 2020s.

And what occurred to actual financial progress? Nicely, the efficiency of actual GDP is depicted within the following graph.

Be aware…total…the continued upward actions of the 2 charts over the whole interval.

The combination progress price of actual GDP was 2.3 p.c towards 2.1 p.c – labor productiveness.

It is usually price noting that after the interval of the unfold of COVID-19 and after the recession, the expansion price of the economic system continued.

The 2 sequence appear to have been very carefully intertwined throughout this time.

It seems that labor productiveness progress has been linked to financial progress.

What about financial coverage throughout this era?

Nicely, it was a time frame when Ben Bernanke, as Chairman of the Board of Governors of the Federal Reserve System, modified the main focus of financial coverage.

Mr. Bernanke launched a financial course of he referred to as “quantitative easing.” And he presided over three rounds of quantitative easing throughout his tenure as Fed chairman.

A spherical of quantitative easing has seen the Federal Reserve repeatedly add securities to its portfolio after the Fed tells the market what it will do.

There was no actual market response to this coverage, and the expansion of labor productiveness and the expansion of the US economic system went easily.

The economic system was supply-driven and inflation remained very modest all through all three durations of quantitative easing.

Then the Covid-19 pandemic started.

The Federal Reserve responded with one other spherical of quantitative easing.

Then, due to all of the disruptions occurring within the economic system, inflation reared its head.

In March 2022, the Federal Reserve responded with a sequence of quantitative tightening measures.

The economic system picked up and…as you’ll be able to inform from the charts…provide took over once more.

As I’ve written constantly since then, there was some huge cash within the economic system, cash that got here into the economic system in the course of the fourth spherical of quantitative easing to fight the pandemic, in order that quantitative tightening didn’t detract from financial progress. coming from the availability facet.

And right here we’re.

The U.S. economic system is rising sooner than analysts anticipated as technological innovation within the nation continues to speed up.

The availability facet dominates the productiveness of the economic system.

The Federal Reserve “allowed” the proposal to dominate by following its coverage of quantitative tightening.

Mr. Bernanke should be very blissful.

The Fed’s coverage rate of interest

Given this state of affairs, Jay Powell, the present chairman of the Federal Reserve Board, is confronted with what to do concerning the Fed’s rate of interest.

Mr. Powell urged it might be minimize someday this yr … perhaps a number of occasions this yr.

Now he appears to be abandoning the thought. Possibly there will likely be one minimize… perhaps two… however we could not even see these cuts.

What is going on?

Nicely, two issues.

First, the economic system appears excellent. We will wait and see if a Fed price minimize is actually essential.

Second, presidential elections will likely be held this fall. Mr. Powell should be feeling the stress. If the Fed does one thing, Mr. Powell… and the Fed… will certainly be closely criticized for what he… and the Fed… are doing.

Criticism?

Mr. Powell will likely be criticized for selecting insurance policies designed to assist the incumbent president get re-elected.

My guess is that Mr. Powell want to keep away from choices on financial coverage modifications till November of this yr.

Let’s have a look at.

The Fed’s steadiness sheet

Final “banking” week noticed little or no change within the Fed’s steadiness sheet.

The marketplace for repurchase agreements was used, however the transfer was minor.

General, the Fed decreased its portfolio of securities by simply over $1.6 trillion. As well as, the Fed has now decreased its use of repurchase agreements by $1.0 trillion.

General, business financial institution reserve balances, that are a proxy for extra reserves within the banking system, fell by $518.4 billion since March 16, 2022.

So the Federal Reserve continues its quantitative tightening program.