Looking at the Economy from Both Sides Now

There must be something in the water at the Distinguished Speaker Seminar at the European Economics and Financial Center in London because Federal Reserve Board Gov. Christopher Waller gave a distinguished speech with a heavy dose of British understatement.

Under the title “Something’s Got to Give,” Waller deftly avoided drawing substantive conclusions about the path of the U.S. economy, offering the standard Fed “wait, watch and see” perspective.

While the cautious approach is often the best when you’re a Fed governor and an economist, Waller opened his speech with an insightfully confusing take on the economic future.

“Economic activity and the labor market have been strong with what looks like growth well above trend and unemployment near a 50-year low,” he said. “Meanwhile, there has been continued gradual progress in lowering inflation, and moderation in wage growth. This is great news, and while I tend to be an optimist, things are looking a little too good to me, so it makes me think that something’s gotta give.”

Clearly, the force of optimism is not strong in this one.

What Waller means is the “thing” in “something’s gotta give” is the economy and what it must “give” is growth. That’s not optimism. That is classical economist pessimism, wrapped up in a folksy observation designed less to inform than to soften the expected financial blow.

Waller laid out two possible scenarios for the economy – one where supply and demand find balance bringing inflation in line with the Fed’s 2% target or one where the pace of demand remains strong, causing another spike in inflation.

But clearly, Waller – like most of his colleagues at the Fed – is worried about inflation and looked to historical precedents to buttress his concerns despite a falling consumer price index, saying “…we have seen a string of good inflation reports evaporate multiple times in the recent past.”

To make sure he covers the bases and hews to the company line, Waller concluded his remarks saying his views on the potential for additional interest-rate hikes “will be based on a careful assessment of incoming data and financial market developments and a judgement about whether we are continuing on a path of sustained progress toward 2% inflation.”

The study of economics is not for the faint of heart, the mathematically challenged or wearers of rose-colored glasses. But when officials offer predictions with one hand and contradictory projections with the other, it is clear the two-handed approach is designed to cover their behinds rather than enlighten the general public.

Even the most casual observer understands the economy will go up or it will go down and the prices rise and fall and jobs come and go. Instead of hiding behind a wall of rhetorical bloviation and under a mountain of statistics, the Fed would be better served – and serve the public better – with straightforward honesty and a respect for our collective capacity to comprehend some basic principles of how the economy works.

One of the biggest reasons why many consumers feel insecure about their financial futures is because public officials make it seem as if good news about the economy – robust job growth and lowering inflation in particular – is somehow a bad thing.

Nobody wants to see irrational exuberance at the Federal Reserve, but a little less negativity would be welcome.