Charles Steindel

The Federal Reserve Bank of Philadelphia’s state coincident indexes in December were somewhat mixed. The indexes in 16 states were down from November, thought the largest decline was Minnesota’s fairly modest .41 percent. Of more concern was 16 states showing declines at the three-month horizon percent, and two more unchanged. Three states (Minnesota, Maine, and Vermont) had declines larger than .5 percent. On the upside, only seven had gains of more than 1 percent, which is less than what has recently been the case (Texas was the only one of the 4 largest states in this group).  Over the past 12 months the count of states seeing gains of 5 percent or more was reduced to 9 (including California, Florida, and Texas) while 4 states (Arizona, Montana, Mississippi, and Oklahoma) had increases under 2 percent. 

The independently estimated national figures of growth over the last 3 (.81 percent) and 12 (4.12 percent) were plausibly in line with the state results.

State Coincident Indexes in December 2022

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The Federal Reserve Bank of Philadelphia’s state coincident indexes in March showed some moderate variance. Four states were down slightly from February. The largest increase was Arizona’s .8 percent; three other states (Iowa, Delaware, and Vermont) had gains of at least .5 percent. Over the three months since December, Massachusetts was up 1.9 percent, while 8 other states (scattered across the nation) rose more than 1 percent. Over the last 12 months, Massachusetts again led, with an increase of 4.9 percent, while New York’s 3.6 percent was a fairly distant second. 5 states were down over the period, with Montana’s slump continuing, with a loss of 3 percent.

The independently estimated national figures of growth over the last 3 months (.75 percent) may be a touch higher than the state estimates would have suggested, but the 12-month figure (2.9) percent) looks to be roughly in line with the state numbers.

State Coincident Indexes in March 2024

State labor markets were little-changed in March, but on the whole the report looked better than February’s. Only five states had statistically significant gains in payrolls (Arkansas, Georgia, Kansas, Kentucky, and Virginia), with two having .5 percent increases (Arkansas and Virginia).  The other states, and DC, had insignificant changes, though numbers had point increases comparable to those that were deemed significant. For instance, California had an increase of about 30,000, though that was less than .2 percent, and New Jersey was up around .3 percent.

Six states had statistically significant declines  in their unemployment rates in January, while one had a significant increase. The only move larger than .1 percentage point was a decline of .3 percentage point in Arizona.  The highest unemployment rates were in California  (5.3%), DC (5.2%) and Nevada (5.1%). States with unemployment rates of 4.8% (one point above the national rate)were Illinois, New Jersey, and Washington.   Maryland, Minnesota, Nebraska, New Hampshire, North Dakota, South Dakota, Utah, Vermont, and Wyoming  had rates of 2.8% or lower, with North Dakota at 2.0%.

Puerto Rico’s unemployment rate moved up to 5.8 percent, while the island’s job count moved up by 2,200.

State Labor Markets in March 2024

Paul L. Kasriel

In an April 16, 2024 Bloomberg News article entitled “**[What If Fed Rate Hikes Are Actually Sparking US Economic Boom?](https://www.bloomberg.com/news/articles/2024-04-16/booming-us-economy-inspires-radical-theory-on-wall-street?accessToken=eyJhbGciOiJIUzI1NiIsInR5cCI6IkpXVCJ9.eyJzb3VyY2UiOiJTdWJzY3JpYmVyR2lmdGVkQXJ0aWNsZSIsImlhdCI6MTcxMzM5MTUyNSwiZXhwIjoxNzEzOTk2MzI1LCJh)**”, it is argued that the Fed’s increase in the federal funds rate from 0.08% in March 2022 to 5.33% in July 2023, which, in turn, pushed up other interest rates, stimulated US domestic aggregate demand for goods and services by increasing interest income to holders of fixed-income assets. Wow! This novel hypothesis, if valid, turns monetary policy theory on its head.

Let’s look at some data. As can be seen in Chart 1, there does indeed seem to be some positive correlation between the level of the federal funds rate and the level of personal interest income. For example, when the Federal Open Market Committee (FOMC) hiked the federal funds rate from the beginning of 2016 through the first quarter of 2019, personal interest income moved up sympathetically. Although personal interest income had started increasing in 2014, before the FOMC had begun raising the federal funds rate. Similarly, as the FOMC began hiking the federal funds rate in 2022, personal interest income starting rising, too. So far, so good for this hypothesis that FOMC federal funds hikes raise personal interest income.

240418X1.jpg

But, when we compare personal interest income to total personal income, the story changes (see Chart 2). As the federal funds rate increased in 2016 through early 2019, personal interest income as a percent of total personal income moved up only marginally. In the 2022 through early 2024 period, the ratio of personal interest income to total personal income did move up, but only slightly higher than the level that prevailed in 2020, when the federal funds rate was effectively zero percent, and considerably below the 2019 level, despite a much higher federal funds rate in the more recent period. If higher personal interest income were responsible for the recent resilience in aggregate domestic demand, personal interest income as a proportion of total personal income would be higher. Alas, another beautiful theory spoiled by ugly facts.

240418X2.jpg

Let me offer a different hypothesis as to why US aggregate demand has remained resilient in the face of the FOMC’s federal funds rate hikes starting in 2022. This hypothesis was hinted at by one of my readers, Tague Goodhue, Managing Partner at Pantheon Investments, LLC. A year or so ago, Mr. Goodhue observed that although the growth in thin-air credit (the sum of the monetary base and loans/investments at depository institutions) had slowed dramatically, the amount outstanding of thin-air credit remained exceedingly high, such that the ratio of nominal GDP-to-thin-air credit, or the “velocity” of thin-air credit was comparatively low in terms of the period from the recovery of the Great Financial Crisis up until the Covid negative supply shock. This low velocity on thin-air credit implied that the public’s demand to hold rather than spend the resulting liquid assets created by thin-air credit was relatively high. If I had paid more attention to Mr. Goodhue’s observation I might not have made one of the worst calls of my career, including my retirement. That bad call being that a recession would begin in 2023 because of the precipitous slowing in the growth of thin-air credit. I won’t make that mistake again, just a different one.

As I mentioned, the creation of thin-air credit results in the creation of liquid assets. Plotted in Chart 3 are quarterly observations of thin-air credit (the blue bars) and quarterly observations of households’ and nonfinancial businesses’ holdings of deposits (demand, saving and time) and money market mutual fund shares (the red line). As you can see, starting in Q2:2022 through Q4:2024, the levels of thin-air credit and household/nonfinancial business holdings of deposits and money market mutual fund shares are almost equal.

240418X3.jpg

Now, let’s look at the relationship between the private nonfinancial sector’s holdings of deposits and money market mutual fund shares and private Gross Domestic Purchases (private aggregate demand). This is plotted in Chart 4. It is, in effect, the inverse of a velocity concept. As can be seen, as of Q4:2023, the private nonfinancial sector’s holding of deposits and money market mutual fund shares as a percent of nominal private Gross Domestic Purchases remains high relative to percentage levels in years prior to the Covid negative supply shock of 2022. Thus, the private nonfinancial sector as of the end of 2023 still held an abnormally-high amount of liquid assets, assets that could easily be used to purchase goods, services and assets.

240418X4.jpg

As an aside, the data plotted in Chart 5 show that growth in a narrower variant of thin-air credit has picked up in the past two quarters, including its bank credit component. Could it be that the Fed’s monetary policy has eased in the past two quarters despite the fact the federal funds rate has been held steady at 5.33.

240418X5.jpg

In sum, I would argue that the “new” view on how monetary works, namely that higher federal funds rates are stimulative, is utter nonsense. (I was going to use another term, but this is a family publication). Rather, the massive amount of liquidity that the Fed created in reaction to the Covid negative supply shock has not disappeared in either an absolute sense, but more importantly in a relative sense. This implies that the private nonfinancial sector, at least through Q4:2023, still has excess funds that it can use to purchase goods, services and assets.

Another Beautiful Theory Spoiled by Ugly Facts

Joseph G. Carson

The Federal Reserve's persistent use of the 'forward guidance' policy tool, which involves offering forecasts of growth, inflation, and policy rates to influence financial market conditions, is a misguided approach. This tool operates under the assumption that the Fed can accurately predict the future, a notion that is inherently flawed given the unpredictable nature of economic conditions.

In 2023, policymakers used its forward guidance policy tool to signal an end to its tightening policy cycle, thinking it had or would, in time, arrest the cyclical inflation cycle. At the end of the year, it went further, as it offered forecasts for 2024 that promised three official rate cuts.

Yet, in hindsight, forward guidance backfired. Promises of no more rate hikes followed by promises of lower official rates triggered a 100-basis drop in long bond interest rates and double-digit increases in equity prices. The dramatic change towards much easier financial conditions has helped produce economic results that the Fed was not expecting in its forward guidance. (Note: Q1 real GDP growth is estimated at 3%, while core consumer prices rose at an annualized rate of 5%, compared to forward guidance growth estimates of 2% and core inflation of 2.4%).

The challenge for policymakers is how to navigate the modification or discontinuation of the forward guidance policy tool. Forecasts from forward guidance are updated only four times a year, with the next update scheduled for the June meeting. While the Fed chair can provide an informal update at any time, official policy announcements are made at regularly scheduled meetings. A sudden deviation from the last forecast could disrupt the financial markets and undermine the Fed's credibility, if it still has any.

Yet, the problem with "forward guidance" goes well beyond the announcement dates. Policymakers offer forecasts on growth, inflation, unemployment, and policy rates for two years and a longer-run equilibrium level for each. And, regardless of whether current economic conditions are too hot or soft or inflation is too low or high, the Fed's forward guidance forecasts say, through the magic of monetary policy, growth, unemployment, and inflation will gravitate to trend.

Like everyone else, the Fed has had difficulty forecasting what the economy will be like in the next year, let alone in two or three years. Yet, unlike other forecasters, policymakers link an official rate path to its forecasts. That linkage makes official policy more predictable. However, it also creates the potential for a significant easings in financial market conditions, similar to what occurred since late 2023, long before policymakers achieved their intended outcomes.

Policymakers spent time "normalizing" official rates, and now they need to "normalize" their policy statement, making it shorter and with fewer promises. Eliminating forward guidance would also be a positive step because even though it implies "it all depends," it still drives market expectations of official rates.

State Coincident Indexes in December 2022

Charles Steindel

More Viewpoints

State Coincident Indexes in March 2024

State Labor Markets in March 2024

Another Beautiful Theory Spoiled by Ugly Facts

The Fed's "Big" Mistake---- Continuing to Use Its Forward Guidance Framework As A Policy Tool