Grasping Reality on TypePad, by Brad DeLong

For ten years now, the Federal Reserve has:

• overestimated how fast the economy will grow without exceptional support.
• underestimated how many people the US can put to work at "full employment"—the point beyond which inflationary pressures start to build.
• overestimated how fast an inflationary spiral could take hold.
• underestimated the dangers of renewed recession.

And the result has been the worst economic recovery in American history. For example:

• The unwillingness of the Federal Reserve to change its 2%-going-forward inflation target deprived the economy of the usual faster-than-trend bounce-back from the depths of a depression.

• The Federal Reserve's decision to treat 2%-going-forward as a ceiling rather than a target left banks with little incentive to lend out the massive reserves that quantitative easing had led them to hold.

• The Federal Reserve's mid-2010s decision to announce that the time of extraordinary support would soon end nearly brought on a recession.

• The Federal Reserve's end-of-2016 decision to initiate a tightening cycle has left it in it current situation, with the 10-year inflation breakeven for the PCE at 1.3%/year—0.75-points below the Federal Reserve's formal target, in which it dearly wishes the interest rates it controls were lower than they are but does not quite dare take steps to reduce them yet.

More generally:

• The Trump-McConnell-Ryan tax cut has been a complete failure at boosting the American economy through increased investment in America.
  • But it has been a success in making the rich richer and thus America more unequal.
  • And it delivered a short-term demand-side Keynesian fiscal stimulus to growth that has now ebbed.
• The past month has seen an 0.8%-point decrease in our estimate in what seasonally adjusted annual-rate production growth was comparing April-June to January March.
  • This is in part an impact of Trump's attempt to fight a trade war with China
  • Plus Trump's attempts to add a trade war with Mexico to the mix.
• But this is mostly due to what Larry Summers calls "secular stagnation":
  • Financial markets are failing to mobilize the risk-bearing capacity of American society.
  • Thus even very low safe government-debt interest rates have not made capital affordable enough to induce the investment boom we would like to see.