Edward Lotterman

Hubris can be defined as “excessive pride leading to one’s downfall.”

Take, for example, Bob Woodward’s 2000 book “Maestro,” which lauds Alan Greenspan as an unparalleled manager of the U.S. economy. Not surprisingly, that author and book also serve as an example of hagiography — or “excessively flattering biography.”

The definitions of hubris and hagiography are from a dictionary. The sniping at Woodward’s ridiculous book is mine. The public should keep all that in mind when reading about how well the U.S. economy is doing now and how Federal Reserve Chair Jerome Powell is a genius who has achieved a “soft landing” of the economy — something as mythical as unicorns and “surgical air strikes.”

Yes, by virtually all indicators — low unemployment rates, low inflation, good growth of output, good growth in job numbers, etc. — the U.S. economy is doing very well indeed — even as Republicans would like voters to think that things are worse now than during the Great Depression. The numbers are right. Overall, the U.S. economy is doing very well, although some groups within it are doing much better than others.

And yes, Powell, Fed chair since 2018 and a board member since 2012, has done a fine job over extremely challenging years. However, Fed chairs have much less power than is commonly imagined. Thus one should more accurately say that the entire policy-making Federal Open Market Committee, made up of the seven members of the Board of Governors and five presidents of the 12 regional Federal Reserve Banks in rotation, have done a fine job.

But one also should be measured in handing out laurels. Woodward wrote his book about Greenspan at the end of the 1990s, one of the two best decades for the U.S. economy in 70 years. Greenspan had indeed done a good job at the Fed, although his erring on the side of tight money probably had cost George H.W. Bush the 1992 election.

But let’s also credit the administrations of Bush and Bill Clinton during that time for exercising prudence and political skill in getting Congress to right the fiscal ship after a decade of wild experimentation and ballooning of the national debt in the 1980s. In broad terms, we ended the decade with balanced budgets in four consecutive fiscal years.

We briefly had our economy in the bag before Congress and the George W. Bush administration threw the bag away in the new millennium. We would face the exogenous shock of the 9/11 attacks, the self-imposed ones of starting major land wars in the Mideast and allowing an enormous bubble involving collateralized debt to develop in capital markets. The resulting financial debacle of 2007-09 would usher in a harsh period, one marked by increasingly divisive politics as growth in output and incomes stagnated for a second decade in a row.

The last decade went out with a bang when COVID, the most deadly pandemic in a century, stalled global economies. We responded with large and unprecedented increases in payments to households and in the money supply. Meanwhile, COVID was shutting down the consumer economy and international supply chains. Taken together, all this bloated households savings and fueled pent-up consumer demand. That Vladimir Putin started a major land war in Europe just as COVID was easing up fueled the inflation that lingers in people’s minds, if not markets, today. This now is costing President Joe Biden popular approval for any credit he could claim in righting the economy. Could the same be said for Powell’s Fed?

True, news in recent weeks has been good. Inflation measured by the Consumer Price Index has returned to levels below those of the 1980s and 1990s. Real GDP, the inflation-adjusted value of all goods and services produced, was 5.2% higher in the July to September quarter than the preceding one. This was the best quarter in two years and in the top 25% of all quarters since 1980. The unemployment rate of 3.7% falls in the best one-twentieth of all months since 1970.

And Wall Street has responded by sending stock indexes to record levels.

This is all fine, but what does it mean for the Fed? This past week, its policy-making FOMC, on which Minneapolis Fed President Neel Kashkari is a voting member, met for the last time this year. In its concise “statement” after the meeting, it left its target for the Fed funds rate unchanged at 5.25% to 5.5%. It reiterated that it wants inflation to return to its targeted 2% range.

This sounds unyielding, but background documents issued indicate that Fed economists expect the rate to be about a percentage point lower a year from now. That hints the Fed will lower its target and all interest rates will ease.

Based on this evidence, current interest rates, including those for home mortgages, dipped a bit and the stock market responded. Lower mortgage rates will help one of the most beleaguered groups, first-time home buyers in their 20s and 30s. All good news.

One must be careful however, to not celebrate prematurely or excessively. Just as the world economy went south months after Woodward’s lionization of Greenspan, economies can turn in an apparent hurry.

Daunting storm clouds remain on the horizon. Globally, with the wars in Ukraine and Gaza each with no clear possible outcome, Premier Xi Jinping making noises about Taiwan as China’s economy sags, and Venezuela threatening the first land war in South America in nearly a century there are many perils.

Domestically, the political situation is worse. Congress is perhaps at its most ineffective in the history of our republic. We have a visibly aging president running for reelection and the most mercurial demagogue in our history as his possible popular opponent. The Supreme Court, while having little role in economic policy, is in sad disrepute. In other words, the credibility of our most important institutions is thin indeed, Powell’s Fed notwithstanding. The farcical paralysis of Congress on spending matters throws far too large a burden on the presidency and on our central bank.

There is a window of optimism. People in the real world base decisions on real interest rates, the nominal ones on mortgages and credit card agreements adjusted for inflation, not the more abstract ones the Fed dictates. As inflation rates fall, so can nominal interest rates even as inflation-adjusted real ones remain constant. We may have achieved the mythical “soft landing,” but there also are many ruts in the taxiways from here to the terminal.

Related Articles

Real World Economics: Learning lessons from past policies

Real World Economics: The economy is terrible – for the last two decades

Real World Economics: Don’t cry for U.S. if we become Argentina

Real World Economics: Capital reserves needed; here’s why

St. Paul economist and writer Edward Lotterman can be reached at stpaul@edlotterman.com.