But the opening question is aimed at whether monetary policy is the proper vehicle to get us to the full-employment destination. As widely covered here and elsewhere, 9 million U.S. job openings do not suggest that there is a demand problem. It is becoming increasingly obvious that supply issues are the constraint on growth, whether it’s hesitant workers, bottlenecks, shortages, or backlogs. Yet, policy is still set at maximum support for demand, with fiscal policy now poised to add yet another leg, via an infrastructure deal. Those central banks that are now gingerly stepping back—Norway, Mexico, and even Canada—are the few that seem to openly recognize this new reality. Here are 10 signs that policy is too loose elsewhere:
Inflation: We’ll start with the big one. U.S. core PCE just rose 2.3% in the past six months. Big deal, you may think, that’s barely above the Fed’s target rate. But that’s 2.3% not annualized, so core inflation just blew through target in half a year, with six months to go. That has almost nothing to do with base effects, and it’s the fastest half-year clip in 30 years.
Oil and commodities: That sprint in U.S. core inflation, by definition, doesn’t even include the recent run in energy prices. WTI pushed above $74 this week, and is close to its highest level since the triple-digit days of 2014. Even with a pullback in lumber and copper, the upswing in oil and gas weighs heavier, lifting commodity indices to new cycle highs. Thriving commodities do not suggest demand is lacking.
Stocks: After the briefest of lulls, equities globally are close to all-time highs again. The World MSCI index is now up almost 27% in the past 18 months. While that growth rate as a standalone isn’t extraordinary, recall that markets were already at record highs 18 months ago. That is extraordinary strength.
Home prices: From Cleveland, to Chicago, to Copenhagen, to Chatham, home prices are on a tear almost globally. Sales have cooled from white-hot conditions earlier this year, but that has scarcely reined in prices. To pick but one example, the median U.S. home price surged 23.6% y/y in May, well above even the fastest rise in the great 2005-06 housing bubble (16.6%). Oh, and Canada is even hotter, of course.
Asset markets: Rollicking prices are spreading well beyond houses and stocks. Non-fungible tokens may have hogged the spotlight for a spell, but old-school real live art prices have also surged in 2021, a classic cyclical indicator. Wayne Gretzky’s rookie card went for well over $1 million—can Tie Domi be far behind in a world awash in liquidity?
Money supply: I know it’s out of fashion, and a trifle uncool, but money supply trends still offer a rough guide to the direction of price pressures. And they are still pointed due north. Over the past 18 months, U.S. M2 is up 33.5%, far above the prior post-war peak of just over 20% in (gulp) the mid-1970s. Even after removing the spike in spring 2020, M2 has still run well into the double digits.
Crypto currencies and meme stocks: The fact these items are even on the list tells you there’s too much liquidity. No further comment.
Wages: Worker shortages are only just beginning to show up in headline wage measures. Fully 34% of small businesses in the U.S. are planning on raising compensation, one of the highest readings on record and more typical of late-cycle levels, not at the start of a recovery. It’s a similar story for Canadian SMEs, which are now expecting to increase wages over the next year at one of the fastest paces (2.4%) in the past decade. That’s not consistent with an economy operating with a glut of capacity and in need of massive monetary support.
Consumer and business confidence: While perhaps not at peaks, sentiment surveys are generally closer to cycle highs, not lows. To pick but one example, the Euro Area’s consumer confidence jumped in June, and has just seen its biggest four-month rise in 35 years of records. Combined with the build-up of personal savings in most economies, there’s little need for further policy prodding to get consumers to spend.
Fiscal policy: Finally, the case for pedal-to-the-metal monetary policy is weakened by the reality that fiscal policy is already pressing on the gas. This week’s news that a US$579 billion infrastructure deal is at hand simply reinforces the point. While the package will be watered down by some revenue measures (but no tax hikes), the net new spending could still total more than $100 billion/year (or nearly 0.5% of GDP). At the very least, this adds yet another element of growth support in the years ahead, and further weakens the case for an exceptionally easy monetary policy stance for much longer.
Grudging congratulations to the Montreal Canadiens, from a die-hard and unapologetic Leafs fan. Their Cup opponent hangs in the balance, but note that 10 of the 13 series settled so far in the playoffs have gone to the “underdog” (advantage NY Islanders for today, advantage Montreal in the final). The 27-year Cup drought for Canada-based teams may soon be over. One has to openly wonder how thrilled the NHL is with this outcome, given the still-constrained Canada-US border and the still-limited fan capacity in Montreal. But here’s guessing that the Bell Centre fans will more than compensate for numbers with noise. And for the economy—at least the Quebec economy—wouldn’t a Stanley Cup victory be a great accelerant for a grand economic re-opening this summer?