February 14, 2006
WAITING FOR BEN...
It's unclear how much of the game plan he'll reveal, if any, but the pressure promises to be high for spilling the beans, or at least throwing out a bone.
Talking in abstractions about monetary policy and inflation targets won't satisfy politicians this time around. It never did, and isn't about to start now. Nonetheless, that may be all they get when Ben Bernanke fields questions for his debut grilling as Fed chairman on Capitol Hill tomorrow. Among the sea of inquiries that will no doubt get tossed at him, one we'd like to see earn some lip service is exploring Bernanke's thinking (now that he's in the driver's seat) on the connection, real or perceived, between inflation and wages/employment when it comes to grinding out monetary policy decisions.
It's a topical question, considering that unemployment's fallen to 4.7% in December, the lowest since July 2001. Meanwhile, wages are growing nearly as fast as top-line inflation, measured by average hourly earnings and consumer prices, respectively. Using core CPI, which subtracts food and energy from the mix, wages are advancing at a considerably faster rate than inflation. All of which coincides with questions over the next move in the Fed's monetary policy, namely, will the central bank soon declare inflation sufficiently contained and thereby end the current round of interest-rate hikes?
There's reason to wonder, at least for those who find inflationary threats buried in wage and labor statistics. Seeing no less has a lengthy history in the dismal science, the so-called Phillips Curve being the standard example. By this model's logic, a tradeoff exists between inflation and unemployment, i.e., if the jobless rate falls, inflation rises, and vice versa.
There's precious little constancy, however, in state-of-the-art economic thinking. Accordingly, whatever empirical support the Phillips Curve enjoyed over the years began to fall apart in the 1990s, and today there's no shortage of economists who now dismiss the idea that when unemployment falls below a certain level it automatically triggers higher inflation. The question is whether Bernanke agrees, and if he does, might he say so in Congressional testimony?
For what it's worth, monetary thinking inspired by the Phillips Curve isn't necessarily dead; rather, it lurks about, dormant but ready to jump out and say "boo" at any moment. Australia's central bank, for instance, advised on Monday that it was prepared to raise interest rates is wages and labor costs elevated inflationary pressures, according to The Age.
Back in the United States, the cocktail of renewed growth in jobs creation, sharply lower claims for unemployment insurance, and rising wages has some worried that higher inflation down the road is the natural consequence.
But not everyone buys into the view that a bubbling labor market will lead to pricing momentum. In fact, there's enough conflicting data when it comes to wages to debate any which way you see fit. As BCA Research points out, the rate of change in wages and salaries per employee in the U.S. has been falling sharply for months, while the pace of change for average hourly earnings has been rising at a healthy clip. If this makes divining inflation's future tricky, it presents no puzzle to BCA, which counsels that "faster wage growth will not spur a pick up in U.S. inflation later this year." One reason for the optimism is that employment costs have been trending lower, an alternative statistic that found favor with former Fed Chairman Alan Greenspan for gauging what's afoot in labor costs. Might Bernanke continue the tradition?
David Kotok, chief investment officer of Cumberland Advisors, writes in a note to clients last week that "there are early signs of rising wage income but not enough to trigger harsh Fed policy tightening."
But what wage growth can't do, might Joe Sixpack's continued spending spree do the trick? Indeed, retail sales soared last month by 2.3%, the fastest one-month rise since 1999, according to the Census Bureau. On a 12-month basis, retail sales have climbed an impressive 8.8%.
Still, worries abound that consumer spending is due to at least slow. At a press conference this morning in New York, Barry James, manager of the James Small Cap Fund (JASCX), "We haven't had a consumer-led recession for a long, long time, so we're due." Meanwhile, Rich Cervone, portfolio manager for Putnam Investors Fund (PINVX), notes at the event that he expects consumer spending will slow as such stimuli as mortgage refinancing fade.
Everyone has an outlook on 2006. Ben Bernanke no doubt has one too. Ah, but will he share his thoughts in any meaningful way? Stay tuned. The post-Greenspan era will begin shortly. Whether it proves to be an improvement, or something less, is the operative question.
Posted by jp at February 14, 2006 6:11 AM