Jim Hamilton has a nice breakdown on all the positive signs for US growth. I even have a new presentation I am giving titled “Don’t Be Lulled into Fall Sense of Despair” that basically argues that if things go as planned the US economy will be growing steadily and so will profits and tax revenues.

All that having been said my worry is that this will cause the Fed to back off of its aggressive stimulus policy. The Fed should stay the course with QE2 and consider QE3.

As I have mentioned before, we are conditioned to think of 3 – 4% growth as strong. However, that is in a world where there are few slack resources. This is not our world. Our world has plenty of idle resources.

6% growth is not unrealistic. I urge the Fed to push towards that goal. High profits and growing government revenues are great but we need to put people back to work.

The Mankiw Rule for example doesn’t call for raising the funds rate above zero until the (unemployment rate – core inflation) rate drops below 6. Right now we are still above 7.5

FRED Graph

Indeed here is what the Mankiw Rule says the Fed Funds rate should be

FRED Graph

We are still deep into negative territory meaning that we need additional monetary stimulus above and beyond a zero interest rate.

As a side note, I would love to claim that QE2 is behind this increased growth but that is premature. The timing is right on, but we need more evidence before we can claim intellectual victory.

About these ads