The economy is worse than the Fed may think, and policymakers should therefore end all discussions about an eventual rate hike and consider actions such as expanding the central bank’s balance sheet.
That stark assessment comes from the conservative American Enterprise Institute’s John Makin, an economist who has been arguing since last year that a crippling new round of deflation is a more serious threat to the economy than inflation.
Rather than setting targets for a rate hike meant to curb a currently unrealistic risk of inflation, Makin argues that the Fed should preoccupy itself with boosting a weak economy.
(The economist wrote his policy analysis after the U.S. Department of Commerce last week released its third revised estimate of first-quarter GDP growth, which it reduced to -2.9%, but before Thursday’s robust payroll data.)
“That is a Japan lost decade-style number,” Makin says.
The AEI scholar says that confidently stated predictions earlier this year of a 3 to 4% annual GDP growth rate were turned on their head.
“Right up to the initial release of the first-quarter 0.1 percent growth rate in April, forecasters had been calling for a 2.3 percent growth pace,” Makin writes. “Now, on the third try, the Department of Commerce is telling us that the economy actually shrank in the first quarter at a dismaying 2.9 percent pace.”
Failure to reckon with wide gap between expectations and reality, he says, portends “some nasty surprises.”
One such surprise involves overall economic performance for the first-half and for the year. The Fed and other forecasters are expecting an economic rebound.
But, Makin points out, “if second-quarter growth ‘rebounds’ to an on-trend 2% pace, the average growth rate during the first half of 2014 will be -0.5%.”
Such a low figure, even with a positive second quarter, is sure to revive recession worries, he says (though a recession involves two consecutive quarters of negative growth). Even above-trend growth of 2.5% in the year’s second half will yield a “sickly” annual growth rate of 1% GDP growth.
What all this dismal performance suggests to Makin is the “nonsense” of continued worries about future inflation.