Maybe The Federal Reserve Has Been Right About The U.S. Economy All Along

Hard as it may be for its legion of economic, political and media critics (and even some of its own members) to accept, the most recent bullish jobs report from the Labor Department looks like a ringing endorsement of Federal Reserve policies and perspectives on the economy. The Fed has kept its benchmark short term interest rate near zero for six consecutive years and also provided three huge batches of "Quantitative Easing" in the form of aggressive monthly bond purchases to hold longer-dated bonds within a range of interest rates that made mortgages attractive and stock investing less risky, all in the face of a constant barrage of criticism from its internal dissenters and external antagonists.

Just as the Fed itself has consistently averred that its monetary policy decisions would be "data dependent" rather than be driven by predetermined rules, theories or timetables, is it not fitting that judgment of whether the Fed has been right or wrong in its decisions also be driven by the incoming data more so than preset ideology, political persuasions or trading positions?

Moreover, would not a sense that those at the helm of our monetary system really have proven to know whereof they speak add a needed measure of confidence in government that would itself act as a boost to economic recovery (but of course only if it has been duly earned)? It looks from here like the Fed has indeed earned a much fuller measure of respect for its judgments and current posture than has been offered so far.

The Fed bashing certainly started early and often in the Great Recession, exemplified by the constant clamor for an "audit" of the Fed's decision-making first proposed in 2009 by Texas representative and GOP presidential candidate Ron Paul and now championed by his senator son Rand. These two vigorously opposed the Fed's monetary policy (indeed, the Fed's very existence) in terms echoed and amplified with a bond trader's perspective by Tea Party cable TV champions Peter Schiff and Rick Santelli of CNBC. They lambasted Fed Chair Ben Bernanke for his "easy money" policy, with Santelli warning it would lead to hyper-inflation and economic failure.

While Santelli has continued his attack on Bernanke's successor, Janet Yellen, for creating conditions that would destroy the U.S. dollar as well as the economy, he was finally taken on late last year by one of his CNBC colleagues, Steve Leisman, who asserted that even at that point Santelli's Fed critique had proven wrong on all counts given the strong position of the dollar and the revival of U.S. GDP growth.

Meanwhile, both Bernanke and Yellen and their governing majorities faced critiques from within the Fed's membership, especially from regional Fed Bank Presidents Richard Fisher of Dallas and Charles Plosser of Philadelphia, both of whom actively took their dissents public arguing for urgent increases in the benchmark interest rates and quick termination of "QE" in each case because of their concerns about inflation. Both Fisher and Plosser had been dissenting from Fed policy off and on since 2008, when they resisted Fed moves to reduce rates in the face of an incipient recession. Nothing like being wrong both coming in and going out!

In point of fact, even before the most recent report on jobs and unemployment, U.S. economy data showed that the annual inflation rate had decreased in December to 0.8 percent from even the low (in terms of the Fed's 2 percent target) 1.3 percent rate shown in November, undercutting the anti-Fed case of Santelli, Fisher and Plosser quite decisively. The Fed, in fact, has been quite consistent in terms of holding its interest rate fire in view of the fact that inflation has been running too low during the recovery to support the growth in incomes that a solid recovery demands. Check out the Fed's focus in its most recent policy statement concerning when it would begin to raise rates on the "progress - both realized and expected" toward full employment and 2 percent inflation.

The Fed got a fist full of progress in the results of the Labor Department's monthly jobs and unemployment survey for January 2015 -- progress which should put the Fed's doubters to shame. Not only did the report show a 257,000 jump in net jobs for the month -- the 11th straight increase over 200,000 and the best streak of growth in nearly two decades. Even the slight uptick in unemployment was due to the "good news" of the many thousands of individuals who were encouraged enough by "expected" jobs growth to return to the job search themselves! Those expectations, as noted above, are as important to the Fed as the "realized" progress that the January report documented.

Moreover, the report also went some distance in proving that the Fed had been right in its January statement, cited above, when it observed that the jobs market had been showing both strong job gains and a reduction in the under-utilization of labor resources generally. And how! The January jobs report showed major corrections to the upside in previously reported figures for the two prior months, to 423,00 new jobs in November (up 20 percent) and 329,00 in December (up 30 percent). These adjustments mean that America has created a million new jobs just since November 1, 2014.

In addition, a surprise increase of .5 percent in wages in January, possibly due to the onset minimum wage increases in several of the 29 states with their own wage standards over and above the federal law, should also encourage the Fed in its view that the economic recovery is on a good path, since such a turn toward a reasonable level of wage inflation has been cited by Chair Yellen as one of the key indicators of emerging recovery that the Fed would be looking for (and may now have found). The Fed, in its January statement referenced above, agreed to be "patient" in initiating a rate increase and be guided by the incoming data. It may soon be getting additional indications of the economy's progress toward normal growth which could further validate the Fed's deliberate approach.

The upward revisions in the recent job statistics could be a signal of a forthcoming upward adjustment in the somewhat disappointing initial estimate of 4th quarter 2014 GDP growth, which came in at 2.6 percent, off the projected level of upwards of 3 percent. If that statistic is revised upwards by 25 percent like the average of the past two months of jobs data, it would bring the revised number right back on to the expected target, at 3.5 percent. That prospect should give Janet Yellen some measure of confidence as she delivers her semi-annual economic assessment to Congress on February 24 asserting that the Fed's largely positive assessment of the U.S. economic recovery in its January statement was fundamentally correct.

The revised GDP data for the last quarter of last year will be released just a couple days after Yellen's testimony, and if the second and third quarters' data are any guide, the revision will be upward just like the jobs report. Looks like the "academics" at the Fed do know a good deal about the real world after all -- maybe even more than Congress and Cable TV. But that's setting the bar low.


By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education