Janet Yellen admitted that the Fed’s two percent inflation target is largely phony. She didn’t say that in as many words of course.
What she actually said was
It would be imprudent to keep monetary policy on hold until inflation is back to 2 percent
On the one hand, that makes sense. The levers that steer the economy do so more like those that control a supertanker, and less like the steering wheel of a Tesla. So, the Fed Chairwoman is right that you can’t simply wait for inflation to hit 2% and then start raising interest rates. That could lead to a hard landing, or worse, not work at all.
But, that isn’t what she meant. What she meant was that there is no data indicating that inflation will be 2% anytime soon, but that doesn’t square with what she thinks is/maybe/will be happening in the economy. You see, she is convinced that inflation is hiding somewhere, cloaked in stealth mode, undetectable by economic statistics, like some sort of cloaked Klingon finance battleship.
That seems to be a popular theory because of two factors. One, the stock market keeps going higher, and people are starting to worry (a lot) that it is overvalued. The second is that this expansion, while slow and halting, has been going on for about 7 years now. That “should” be the time where a rising economy and a rising stock market combine to start driving up inflation.
The data, however, suggests no such thing. What Yellen and the others can’t seem to come to terms with is that just because employment as a percentage is rising, wages are not. This doesn’t square with what they were taught in economics school 40 years ago, where rising employment also drives up wages. Wages, of course, are pretty much the biggest driver of inflation.
Jobs But No Wages
Unfortunately, a funny thing happened on the way to the inflation forum. Business, with layoffs and a crumbling economy fresh in the rear view mirror have been very cautious on hiring. There are many more part-time workers, or contract workers. In addition, they are erring on the side of hiring too few workers and just making do. Sure, there are drawbacks, but they, like the Fed and the market soothsayers, see the end coming, but they can’t see when.
As a result, hiring is bare minimum, and that not only doesn’t push up wages, it keeps them very much in check. A guy asking for a significant raise doesn’t look all that necessary if you think maybe you can keep the shop running with one less employee.
Add it all up, and the market is missing the key ingredient in real, worrisome inflation, higher wages. There are no job hoppers scoring bigger and bigger paychecks. There are no companies out there hiring the barely qualified just to get bodies in the door. Many of the people listed as “employed” in those government statistics still haven’g gotten a job anywhere near as good, or well paying as the job they lost back in 2007 to 2010.
In other words, the Fed is raising rates based on “shoulda” and “coulda” regardless of data. When they do that,the same thing happens every time: the market crashes and it takes big sectors of the economy with it.
If Yellen and company continue down the path of insisting that the data is wrong, and that their gut is right, the next financial problem won’t be a stock market bubble, it will be another great recession. (That will pop the market though, and anyone who said they thought the stock market was overvalued any time in the last 24 months will insist they “were right.”)