Anyone who’s been on a committee knows what an incredible feat Fed Chair Jerome Powell just pulled off in getting the Federal Open Market Committee to change course 180 degrees from tightening monetary policy to loosening, says Chris Low, chief economist for FHN Financial and the winner of the MarketWatch Forecaster of the Month contest for October.
“Jay Powell has done a marvelous job this year,” Low says. “He should be commended for getting the committee to shift so quickly.” Usually, viewpoints hammered out by committees get set in stone, he points out.
“The rate cuts came in the nick of time,” he says. He thinks they’ll cut one more time early next year.
Low puts much of the blame for the global economic slowdown not on President Donald Trump, but on an obstinate Fed, which had been blithely “normalizing” interest rates in the United States without paying any attention to what those rates were doing to the global economy, as most other central banks were forced to follow the Fed higher or suffer massive capital flight out.
The Fed’s view was “this is not our problem,” Low says. “I think they tightened too much,” leaning against fiscal stimulus that quickly faded.
‘As long as there is slack somewhere in the world, rates will stay low.’
The situation was eerily similar to the one that then-Fed Chairman Alan Greenspan faced in 1998.
“It is just not credible that the United States can remain an oasis of prosperity unaffected by a world that is experiencing greatly increased stress,” Greenspan said, signaling a series of rate cuts that reportedly “saved the world” and extended the U.S. expansion (and bull market) for a couple more years.
The Fed may be coming around to that viewpoint again. Low points to a smart paper written by Fed economist Michael Kiley that concludes that the Fed has been significantly underestimating how much global financial conditions affect the U.S. economy.
“The U.S. equilibrium rate may be substantially lower than estimated in U.S.-only studies,” the paper argues.
Low says the neutral rate for the federal-funds rate is probably around 1%. “As long as there is slack somewhere in the world, rates will stay low,” he says.
A deal won’t fix it
Low doesn’t think the trade war with China caused all our economic problems (but they certainly didn’t help). Any agreement with Beijing wouldn’t fix it all either.
“Europe is in recession. Japan is in recession. China is in a terrible place,” Low says.
By slowing the economy with seven rate hikes in 2017 and 2018, the Fed sabotaged the one thing that could get us out of this slow-growth rut: Investment in productivity-enhancing capital.
He says policy makers have been getting it all wrong: In a deflationary world, a hot economy is a blessing. Once companies start running out of abundant and cheap labor, they start investing in a serious way in new techniques, new equipment, and a better-trained workforce.
When companies complain that they can’t find workers, “that’s the best thing that can happen in the economy,” he said.
Low has been chief economist at FHN (previously branded as FTN or First Tennessee National) since 1998. He says economic analyst Rebecca Kooshak deserves a lot of credit for helping produce the firm’s analyses and forecasts.
|Chris Low’s forecast||Number as reported*|
|ISM manufacturing index||49.5%||47.8%|
|Trade deficit||-$55.0 billion||-$54.9 billion|
|Consumer price index||0.1%||0.0%|
|Housing starts||1.320 million||1.256 million|
|Durable goods orders||-0.5%||-1.1%|
|Consumer confidence index||No forecast||125.9|
|New home sales||700,000||701,000|
|*Subject to revision|
In the October contest, Low had the most accurate forecasts among 44 forecasting teams on two of the 11 indicators we track in the contest: Industrial production and new home sales. His forecasts on three others — the ISM index, the trade deficit and retail sales — were among the 10 most accurate.
The runners-up in the October contest were Robert Brusca of Fact and Opinion Economics, Jim O’Sullivan of High Frequency Economics, Seth Carpenter’s team at UBS, and emeritus business professor Peter Morici of the University of Maryland (and a regular columnist for MarketWatch).
The MarketWatch median consensus published in our Economic Calendar includes the predictions of the 15 forecasters who have earned the most points in our contest over the past 12 months, plus the forecast of the most recent winner of the monthly contest.
The economists in our consensus forecast are: Ryan Sweet of Moody’s Analytics, Christophe Barraud of Market Securities, Jim O’Sullivan of High Frequency Economics, Ian Shepherdson of Pantheon Macro, Seth Carpenter’s team at UBS, Richard Moody of Regions Financial, Michelle Girard’s team at NatWest Markets, Lou Crandall of Wrightson ICAP, Andrew Hollenhorst of Citigroup, Michael Feroli of JPMorgan Chase, Stephen Stanley of Amherst Pierpont Securities, Lewis Alexander’s team at Nomura Securities. Paul Ashworth’s team at Capital Economics, Stephen Gallagher at Société Générale, Michelle Meyer’s team at Bank of America Merrill Lynch, and Chris Low of FHN Financial.