President Donald Trump shouldn’t have buyer’s remorse about appointing Richard Clarida to the Federal Reserve because he is enthusiastically making the case that the Trump tax cut may have raised the economy’s speed limit.
While Fed Chairman Jerome Powell and Vice Chairman for Supervision Randal Quarles both seem to share this supply-side view, Clarida is its “most enthusiastic supporter,” said Stephen Stanley, chief economist at Amherst Pierpont Securities.
At issue is how fast the economy can grow without spurring inflation pressures. The FOMC has pegged that rate at 1.8%.
In a speech last month and again Tuesday, Clarida said this growth rate may be supported by higher capital spending, in turn supported by the Trump tax cut.
Read: Fed’s Clarida says he wants more interest-rate hikes — but doesn’t say how many
Clarida said that while real GDP has been rising at average 3.3% annual rate so far this year, well above the Fed’s speed limit, it has not grossly exceeded the current pace of expansion in the supply side of the economy.
Former Fed governor Larry Meyer quipped that “Trump must now be happy with this [Clarida] appointment, at least, after apparently having buyer’s remorse with respect to Powell.”
Clarida’s views are in the “more room to go” for the labor market despite the low unemployment rate today, Meyer said.
Richard Moody, chief economist at Regional Financial Corp., thinks Powell shares Clarida’s view.
They seem more willing to believe the story that the tax cut gave businesses incentives to invest more which will translate into higher productivity down the line, Moody said.
“They seem at least to believe it’s possible and they are not going too rapidly on raising the fed funds rate, giving the story time to play out. The soft inflation data give them cover to do that,” Moody said.
U.S. productivity rose at a 2.2% annual pace in the third quarter after a strong gain in the spring, marking the best back-to-back performance in four years.
Read: U.S. productivity pops 2.2% in third quarter
Moody said the three biggest storylines for the economic outlook in 2019 are business investment, profit margins and productivity.
There was a lot of talk in earnings calls this quarter about rising input costs like transportation.
Firms are going to have to make a choice. Either allow profit margins to narrow, be more aggressive with pricing, or find ways to foster faster productivity growth.
Greg Robb is a senior reporter for MarketWatch in Washington. Follow him on Twitter @grobb2000.
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