The Federal Reserve swims in a sea of contradictions

The Federal Reserve Board employs 400 PhD economists to advise it on the state of the American economy for the purposes of devising monetary policy. That intellectually formidable group is supplemented by the dozens upon dozens of research analysts employed by each of the 12 regional Fed banks, whose presidents have their fingers on the pulse of the areas they service.
Fed chairman Jerome Powell, not one of the 400 PhDs, adds his Wall Street experience to the central bank’s deliberations. On September 18, he announced a half-percentage-point reduction in its key benchmark rate, and hinted that it was the start of a round of interest rate cuts to give a boost to a slowing economy and to shore up the jobs market lest unemployment reach unacceptable heights.
In the event, the economy grew by 2.8 per cent in the last quarter, and the unemployment rate ticked down to 4.1 per cent, where it remains. Because of the effect of hurricanes, strikes and reporting technicalities, last week’s jobs report — 12,000 added in October — doesn’t add much to the Fed’s usable database as it decides whether its preferred, “core” measure of inflation, now standing at 2.7 per cent, will fall to its 2.0 per cent target if it continues cutting rates to shore up a labour market in which there are few layoffs, low unemployment, hourly pay rising at a 4 per cent annual rate, and the pace of future wage increases likely to be set by outsize awards being won by trade unions.
Like any policymaking body, the Fed swims in a sea of contradictions:
• Two out of every three Americans believe the country is on “the wrong track”. But the Conference Board, a think tank, has reported consumer confidence rising at its fastest rate since March 2021 and hitting a nine-month high in October.
• The Bureau of Labor Statistics reports that job openings have declined. But the Conference Board reports that “views on the current availability of jobs rebounded after several months of weakness”.
• The Bank of America reports that nearly half of Americans feel they are living pay cheque to pay cheque. But consumer spending accelerated to a 3.7 per cent rate in the third quarter, and only 26 per cent of households spend almost their entire incomes on generously defined “necessities”, leaving enough for restaurants, trips and concerts.
Americans, like other people, often tell pollsters one thing and do another. They claim to be hard-pressed but continue to spend on restaurants and travel. They grumble about the increasing size and cost of government, but dutifully pay their taxes. Billionaires keen on fighting climate change use their jets to travel from conference to conference to propose green initiatives. They profess to want to lose weight while their self-reported weight rises from an average of 161 lbs in 1990 to 181 now.
Elections do have consequences, as Barack Obama reminded the losers as part of his effort to unite the nation. This election may decide who gets taxed, how much is spent on greening the economy, whether the government should use tariffs and subsidies to direct economic activities, whether borders should remain relatively open or illegal entrants be sent back, and whether fossil fuels are treated as the wealth of the nation or enemies of efforts to cool the planet.
But Americans are subject to the biblical interdiction that they shall not live by bread alone. There are issues more important than any economic indicator can capture. And more divisive. Some here believe that biological men should be allowed to participate in girls’ and women’s sports; others find this idea offensive. Some believe that the teachers and their unions should decide what children are taught; others say this is a job for parents. Some favour allowing religious groups wide latitude; others believe that government policies take precedence. Some believe in unrestricted access to abortion; others call that “murder”. We have experienced what Chris DeMuth, a scholar at conservative think tank the Heritage Foundation, labels “the collapse of common culture”, which, I might add, brings with it a collapse of civility.
Fortunately, an otherwise appalling election campaign — one in which these divisions have been exacerbated — has also forced vote-seeking candidates to recognise voters’ distaste for their more extreme positions. Seeking Republican votes, Kamala Harris has admitted she is a gun-owner. Seeking Democratic votes, Donald Trump has abandoned calls for a federal ban on abortion. Seeking Republican votes, Harris now seems to have walked back her call for a ban on fracking. Seeking Democratic votes (and to appease Elon Musk), Trump has found some limited virtue in electric vehicles.
The good news is that the absorption of many Americans in the most divisive issues wanes once elections are resolved, and political television adverts are replaced with those for fast foods and the medications that can offset their effects. There are trips to plan, ageing relatives and children to tend to, football and basketball seasons to bet on, jobs to be done. After Powell pilots the economy to the soft landing most forecasters are predicting.
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Irwin Stelzer is a business adviser