Trump’s Federal Reserve is planning to send the economy into a tailspin to fight ghost inflation. While some folks here might see that is helpful in getting Trump out of office, combining what is going to be a racially charged election with tough economic times is the height of madness.
Quoting from Bloomberg:
The Fed’s Summary of Economic Projections, or SEP, released at the end of this week's Federal Open Market Committee meeting, projects an unemployment rate of 3.9 percent at the end of 2018. This is well below the Fed’s current estimate of the longer-run rate of unemployment, equivalent to NAIRU, or the non-accelerating inflation rate of unemployment, which remained at 4.6 percent.
. . .
The somewhat restrictive policy tempers economic activity sufficiently to nudge the unemployment rate back up to 4.6 percent. But therein lies the problem in this forecast. There is no evidence that the Fed can nudge the unemployment rate up 0.7 percentage points (from the projected low of 3.9 percent to 4.6 percent) without more aggressive rate increases that would trigger a recession.
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Historically, the Fed has not been successful in orchestrating an increase in unemployment of only 0.3 to 0.4 percentage points without triggering a recession. So why should we believe that the central bank can safely push up the unemployment rate by about twice that magnitude as projected in the SEP? That’s a recession all by itself.
Don’t do this!
There is no inflation. According to the Dallas Fed six and 12 month PCE is running below target at about 1.6%. The Trump Tax Cut is already going to slow the economy by shifting income from fast spending low income Americans to slow spending high income Americans. This will drop the velocity of money contracting the currency supply and putting downward pressure on the economy. Bitcoin is a pure 19th century style private currency almost straight out of The Monetary History of the United States. Eventually it’s going to have a crisis, blow up, and go to zero. When that happens both the public and academics are going to start asking if bubbles are not being caused by an inadequate currency supplies with risky assets being used as a stand in for safe currency.More to the point, a recession at any point before the 2020 election would be vastly politically destabilizing. Foreign powers are attempting to undermine the political system of the country. Over the next several years stability is worth suffering a higher inflation rate. This is simply not the time to risk a run of the mill recession in order to fight some imagined inflation monster, or for that matter even real inflation. The long term historical average inflation rate is 3.22%. We have a long way to run before we reach that.
At the very least, do not go setting off a recession until you can be confident that foreign powers are not going to get onto Facebook and Twitter and try to use the event to spark a civil war.