Consumer Credit at All-Time High: What Does This Mean for the Fed Chair Race?

Consumer credit as a percent of disposable income is at an all-time high. What could the policies of John Taylor and Jerome Powell mean for consumers?

Americans have been tapping into credit at levels we’ve never seen before. Some of the faster growing types of credit, like credit cards and student loans, float with interest rates. This means that more Federal Reserve rate hikes could make it harder for households to pay off debt. However, we might not see a wave of defaults that we’d expect in these circumstances.

That’s according to Wells Fargo’s Chief Economist John Sivlia and analyst Harry Pershing. In a weekly interest rate research note released on October 25th (link here), Silvia and Pershing note that consumer credit is at an all-time high compared to disposable income. That would normally bring about fears of a coming crisis, as a wave of defaults could push the U.S. economy right back into recession.

However, the authors argue that the Fed will raise interest rates slower than incomes will rise. That would mean consumers would pay more on debt, but it would be less of a burden compared to incomes.

Household debt delinquencies have mostly been falling since the Financial Crisis of 2008-09. Even though consumers are taking on more debt as a percent of income, they are still paying it down and not defaulting. Steady economic growth and a continuously improving labor market are certainly making consumers feel better about their debt burdens. The only way we’d see a spike in defaults is if rates rise much faster than expected.

What does this mean for the Federal Reserve Chair race?

Jerome Powell and John Taylor are the front-runners at this point. Powell would represent a continuation of current Fed policy, while Taylor is a bit more of a wild card.

Taylor’s famous Taylor Rule formulates the proper level of Fed base interest rates. It currently stands at about 3.0 percent. This is sharply higher than the current level of 1.25 percent. A move this big would be a huge shock to consumers holding floating rate debt.

Not everyone is convinced a Taylor Fed would raise interest rates this much, though. Taylor recently argued that the economy could withstand a 3 percent growth rate without too much inflation (specifically, if tax cuts lead to GDP growth). That would be a reason to leave rates lower.

Yellen, on the other hand, thinks inflation will tick upward if a massive tax package is passed. She would likely opt to raise rates in this scenario. Countering prevailing opinion, rates could be higher in a Yellen/Powell Fed than a Taylor Fed.

Consumers have benefited from a steady and predictable economy over the past decade. A massive shift in monetary policy could be the trigger that upends this consumer confidence, which makes this Fed horse race so intriguing.

Weekly Wrap: The Best Part of Trump’s Tax Reform? Agreement That Deficits Don’t Matter

[su_box title=”Sign Up For Our Weekly Wrap Email” title_color=”#ffffff”]Big news: our Weekly Wrap will officially be moving over to email starting next week. Please click here to subscribe.[/su_box]

Welcome to the 12th edition of the Weekly Wrap, where our deficit of gratitude for your reading this is bottomless.

Tax Reform And Shifting Opinions

Tax reform got one step closer this week as the Senate voted 51-49 in favor of a 2018 budget. This will allow Republicans to pass a tax bill without 60 votes in the Senate. Of course, this means tax policy will be in place for a maximum of 10 years, but we’ll look past that for now.

This is great news on one particular point. Policymakers are finally realizing that deficits don’t matter. As White House Budget Director Mick Mulvaney noted (via Bloomberg),

“I’ve been very candid about this. We need to have new deficits because of that. We need to have the growth… If we simply look at this as being deficit-neutral, you’re never going to get the type of tax reform and tax reductions that you need to get to sustain 3 percent economic growth.”

The tax package “The tax measure could add as much as $1.5 trillion to budget deficits over a decade,” according to the New York Times. The massive tax cuts are being paid for (or at least somewhat offset) by eliminating or capping some popular items, like state and local taxes and retirement savings tax breaks. These mostly impact the wealthiest of taxpayers, though many middle income earners will still see tax hikes.

But getting back to debts and deficits. The United States can borrow effectively endlessly from the rest of the world. That’s why bond yields are still so low by historical standards, even though the national debt is at an all-time high and still growing. The U.S. government simply having the ability to tax the wealthiest population on earth is enough for U.S. Treasury bonds to be the ultimate safe haven. Thus, deficits and debts don’t matter.

What would be a big deal is threatening the world’s confidence in the U.S. Treasury and the dollar. Exorbitant privilege is the term economists use to describe the dollar as the world’s reserve currency (here’s former Federal Reserve Chair Ben Bernanke on Exorbitant Privilege).

Oil is denominated for in dollars across the globe. Foreign nations borrow in dollars because it adds an air of stability to investors. Borrowing in dollars forces budgetary discipline on those governments. After all, if they have to devalue their home currency, the debts in U.S. dollars become more unsustainable.

The dollar as the world’s reserve currency is an inherent subsidy by the rest of the world to citizens of the United States. If misguided foreign policy, trade policy, or simply upsetting the apple cart just to create chaos were to threaten the dollar’s global status, Americans would feel the pinch big time.

What We Wrote This Week

The Growing Chasm Between Barcelona and Madrid: Checking in on the Catalonia Independence Referendum

“If there’s an impasse, or Puigdemont demands a hard Catalonia exit, or there are more riots in the streets between Catalonian nationalists and integrated Spanish supporters, that yield could shoot right back up.”

What Do Trump Stock Market Tweets Mean for the Fed Chair Decision?

“Trump likes to tweet about stock market milestones. But Trump also has a decision to make about who will lead the Federal Reserve. A hawkish pick for the Fed chief could increase the chances of a stock market correction.”

Why a Brexit Deal Remains a Leap of Faith: Theresa May’s Big Week of Negotiations

“Theresa May is finding out that Brexit negotiations are producing no winners. She herself, with a tenuous grip on the Prime Ministership, is feeling the burn the most.”

Watch our videos from this week

Spot Exchanges Shorts: Will Catalonia Leave Spain?

Spot Exchanges Shorts: The Apprentice: Federal Reserve Edition

Econ Vlog: Is Global Political Risk Creeping Up on Investors?

 

Cover photo: Gage Skidmore (Flickr Commons)
</script>

Econ Vlog: Is Global Political Risk Creeping Up on Investors?

Weekly Wrap: Fed Chair Musical Chairs, Jeff Sessions Wrong About Dreamers and Jobs, and Taxing 401(k)s

This was first published on Facebook. To get the Weekly Wrap hot off the press, please like us on Facebook.

Welcome to the 6th edition of the Weekly Wrap, where we won’t step down for “personal reasons” anytime soon.

Fed Chair Musical Chairs

And no, this isn’t about saxophonists Alan Greenspan or Ben Bernanke (below).

Stan Fischer, Central Banker Extraordinaire, Steps Down

Stanley Fischer handed in his resignation this week citing “personal reasons.” He will step down from the Fed’s #2 post in October. This is a big deal. First, because Fischer is considered the top authority in the world on central banking.

• Peter Coy in Bloomberg Businessweek: “Fischer is royalty in central banking circles. He was born in Northern Rhodesia, now Zambia. As a professor of economics at Massachusetts Institute of Technology, he taught former Federal Reserve Chairman Ben Bernanke and current European Central Bank President Mario Draghi, as well as Larry Summers, a former Treasury Secretary, and Gregory Mankiw, who headed President George W. Bush’s Council of Economic Advisers. Among others. Fischer also ran the Bank of Israel from 2005 to 2013, earning an A from Global Finance magazine. (Bernanke got a B.)”

Second, what next?

• JPMorgan Chief U.S. Economist Michael Feroli: “It adds a further element of uncertainty to policy and who will be running policy early next year. It adds to the cloudiness of the outlook for monetary policy.” (Bloomberg)

The Apprentice: Fed Chair Edition

Bettors on the online politics betting site PredictIt are now giving Kevin Warsh a 29% chance to have the top job in February. Janet Yellen is second at 27%.

Gary Cohn went from 30%+ last week to 13%, allegedly because of his comments to the FT about Trump’s response to Charlottesville. 

Warsh is a former Fed official, and has been critical of the Fed’s dovish policy in recent years.

• In January, Warsh colorfully wrote in the WSJ: “In recent years, the rationale for the Fed’s choice to loosen or tighten policy has been as nebulous as Justice Potter Stewart’s famed definition of pornography: You know it when you see it.”
• Warsh also criticized the Fed’s stance of “data dependence,” arguing it should instead be “trend dependent.”

This type of critique and an implicit commitment to increasing rates (labor market has been trending positively for years!) will be a slam dunk to congressional Republicans.

But what about the White House?

Don’t Count Out Yellen

As Nick Timiaros and Kate Davidson of the WSJ wrote in June, “The Republican president told Ms. Yellen he considered her, like himself, a “low-interest-rate” person, those familiar with the exchange said. During a conversation that lasted about 15 minutes, they discussed how economic policy might help the millions of U.S. citizens who felt left behind during the postcrisis recovery.”

Takeaway: Low interest rates can be a president’s best friend, especially when you want to become “the greatest jobs president that God ever created.” But remember, this has to be cleared by Congress – will the White House bend toward the prevailing sentiment in the Republican-controlled Hill and put up a more hawkish nominee?

DACA and the Economy: No, Dreamers won’t take your job

The White House’s decision to end the DACA program in six months is a political missile launch. But while the future of the program gets debated, it has huge economic impacts.

Noted economist Jeff Sessions: “[DACA] has denied jobs to hundreds of thousands of Americans by allowing those same illegal aliens to take those jobs.”

This is just plain incorrect. Economists have been fighting for decades to rid the public of the scourge of the lump of labor fallacy.

• The lump of labor fallacy is the idea that there are a fixed number of jobs in an economy. The theory argues that if an immigrant takes a job, a native American has thus been denied a job.

The idea of a zero-sum job market has been proven incorrect. Repeatedly.

Some noted economists came out in full force at the statement:

• Bloomberg View’s Noah Smith wrote an impassioned takedown of the idea: “It’s obvious that the number of jobs in the world isn’t fixed. Imagine if the United States deported every single American except for Jeff Sessions. Would Sessions then have his pick of any job? No, he’d be in the forest trying to eat berries to survive.”

• Moody’s Chief Economist Mark Zandi wrote to Politico: “The dreamers are generally well educated and thus likely in jobs for which demand is strong and labor shortages are increasingly a problem. And African American and Latino unemployment rates are close to record lows. If we kick dreamers out of the country, then there will only be more unfilled positions. Repealing DACA is particularly wrong-headed economic policy.”

A quick snapshot of the labor market also quickly takes the idea out to pasture.

 

June JOLTS data: There is no shortage of jobs available.

There are more job openings now than at any point since 2000. And workers continue to quit at increasing rates – an indication that those people think they can find better opportunities than what they currently have.

Take solace, or be further depressed? Using the lump of labor fallacy as a political WMD isn’t exclusive to the United States.

Vince Cable reveals that when he was business sec, May suppressed nine reports showing immigration did not hit wages or jobs. pic.twitter.com/Ypo3P7MI2s

— Ian Dunt (@IanDunt) September 6, 2017

//platform.twitter.com/widgets.js

What’s next? Trump seemed to walk back on the idea later in the week — First, tweeting “Congress now has 6 months to legalize DACA (something the Obama Administration was unable to do). If they can’t, I will revisit this issue!”

Takeaway: According to economists, DACA is a place where “America First” nationalism and the desire to become the “best jobs creating president ever” are incongruent.

White House: Pay for tax cuts by taxing 401(k) contributions. Maybe.

Business Insider’s Josh Barro, not a fan of the politics of this possibility:

Hahahah why not pay for the tax plan by punching nuns and orphans in the face and banning french fries, that’ll be about as popular. https://t.co/d9DFyv3m4v

— Josh Barro (@jbarro) September 4, 2017

//platform.twitter.com/widgets.js

I’ll bite. Time for a round of “State Your Unpopular Opinion”: This is actually a good policy.

You might be yelling into your computer screen, “But if you tax something, then people do less of it!

That would indeed be bad – Americans clearly save far too little for retirement. But…

You could actually save more for retirement by taxing 401(k) contributions upfront

Taxing 401(k) contributions upfront would be the equivalent of treating all 401(k)s as Roth 401(k)s. Those work just like Roth IRAs: you get taxed when you contribute, but get to withdraw tax-free.

A simple example: You are going to retire next year, so you have one year of 401(k) contributions before withdrawing. You want to make the max contribution of $18,000, have a current 20% tax rate, and will earn a 6% return.

Here’s the catch: If you contribute the maximum allowable amount to a regular 401(k), you must invest your tax savings to close the gap between it and the Roth 401(k). But if you contribute well below the max – say, $5,000 a year – it doesn’t matter (assuming your tax rate is the same now and in retirement).

If you do contribute the max $18,000 to a 401(k)…

[table id=1 /]

Assuming your tax rate stays at 20% in retirement, the Roth is better by $173.

If your tax rate increases to 25% at retirement, suddenly the Roth is better by $1,116. If you’re making $18,000 annual contributions to your 401(k), moving to a higher tax bracket is a distinct possibility.

This is just over a period of one year. Compound this scenario out over 30 years, and you would have hundreds of thousands of dollars more in your account at retirement. BUT NOTE: If your tax rate were to fall in the future, the plain ol’ 401(k) could be worth more.

Takeaway: Taxing 401(k) upfront sounds bad, but it’s really not that big of a deal for you. In fact, it can be great for you. For the government, however, the math works in the opposite direction. The Treasury gets more money upfront in exchange for less tax revenue in the future. It’s just an accounting trick to make short-term deficits looks better. But it could increase deficits over the long run if personal income tax rates go up.

Other Links and Notes

Tyler Cowen, writing Tyler Cowen types of things: “But I wish to suggest that price gouging, in spite of its obnoxious-sounding name, is usually the best of a set of bad alternatives. If you are inveighing against high prices after a storm, basically you are lining up with the interests of American big business, at the possible expense of storm victims.” (Price Gouging Can Be a Type of Hurricane Aid; Tyler Cowen, Bloomberg View)

Inequality in a very human form — a janitor in the 1970s Rochester vs. a janitor in the 2010s Cupertino: “In the 35 years between their jobs as janitors, corporations across America have flocked to a new management theory: Focus on core competence and outsource the rest. The approach has made companies more nimble and more productive, and delivered huge profits for shareholders. It has also fueled inequality and helps explain why many working-class Americans are struggling even in an ostensibly healthy economy.” (To Understand Rising Inequality, Consider The Janitors at Two Top Companies Then and Now; Neil Irwin, NYT)

Hurricane Harvey and San Francisco — a great primer on the economics of land use policy: “The point is that this is one policy area where “both sides get it wrong” — a claim I usually despise — turns out to be right. NIMBYism is bad for working families and the U.S. economy as a whole, strangling growth precisely where workers are most productive. But unrestricted development imposes large costs in the form of traffic congestion, pollution, and, as we’ve just seen, vulnerability to disaster.” (Why Can’t We Get Cities Right; Paul Krugman, NYT)

Relevant to today’s political discussions — technology doesn’t kill jobs, but rather shifts jobs around to more productive firms: “This demonstrates something routinely overlooked in the anxiety about the job-destroying potential of robots, artificial intelligence and other forms of automation. Throughout history, automation commonly creates more, and better-paying, jobs than it destroys. The reason: Companies don’t use automation simply to produce the same thing more cheaply. Instead, they find ways to offer entirely new, improved products. As customers flock to these new offerings, companies have to hire more people.” (Workers: Fear Not the Robot Apocalypse; Greg Ip, WSJ)

Weekly Wrap: August Jobs Report Whiffs as Other Data Hits; Trump’s Tax Reform, Like Game of Thrones with Investment Bankers

This was first published on Facebook. To get the Weekly Wrap hot off the press, please like us on Facebook.

Welcome to the 5th edition of the Weekly Wrap, where jobs day is as exciting as Christmas morning is for a 5-year-old.

This week’s economic data dump

This was a massive week for economic data. A few highlights:

• Q2 GDP: Revised upward to 3.0% vs. expectations of 2.7% (Business Insider)
• Consumer spending: Jumped 0.3% vs. expectations of 0.4% (Bloomberg)
• Pending Home sales: Fell by 0.8% in July (NAR)
• Consumer confidence – hits second highest level since 2000 (Bloomberg)

Capping it off is today’s jobs report:

• Net jobs: 156k vs. 180k expected; down from July’s 209k gain
• Unemployment rate: Jumps to 4.4% vs. last month’s 4.3%
• Hourly earnings: +2.5%, below expectations of +2.6%
• Coal mining jobs: +0, vs. last month’s -100

After the report, treasuries fell, the dollar weakened, and the market jumped. This points to investors betting that the Fed pushes off the next rate hike.

Things are… humming along?

• The employment numbers cap off a week of mixed data. The Q2 GDP number is quite positive, but employment and wages were softer than expected.
• There is a divergence between the consumer confidence number and the consumer spending. This mirrors the giant gap between the hard data (investment) and soft data (confidence) in the business community.
• Then, there is the question about what the Fed will do. Will strong GDP numbers signal a coming rate hike? Or will the lack of inflation, tepid consumer spending (which makes up 70% of the economy) and ho-hum wage growth give the central bank pause?

Takeaway: People say they are optimistic about the economy, but their spending – especially on big ticket items and homes – are more muted. That will only become more muted if wages taper off.

Something to watch for: What impact will Hurricane Harvey have on the United States economy? Economists see GDP growth being lowered by 0.2% in Q3, but being raised by the same amount in Q4 (Bloomberg). There’s often optimism that after a giant disaster like Harvey the economy will get a boost (classic Keynesians…). But it will most likely be a wash.

Trump’s Tax Tactic: Give it to the Goldman guys

It was a fascinating week for tax reform. We had so little for so long (as we recently discussed), but things could be finally moving:

• Julie Hirshfeld Davis and Kate Kelly of the New York Times wrote a fascinating look at the state of the White House’s tax reform this week. It pits economic advisor Gary Cohn and Finance Minister Steve Mnuchin against both Congress and each other.
• The football hasn’t exactly moved, however. Trump has stated a desire to work with Paul Ryan and Mitch McConnell on a plan, but a hot Tweet finger could make that difficult.
• Steve Mnuchin told CNBC this week that the White House has a “very detailed” tax plan that is being discussed across members of congress. More detailed than the couple hundred word tax reform one-pager?
• Trump stated in his presser this week that big corporate tax cuts would lead to higher wages. There’s a bit of an issue with that, however – corporations have seen all-time highs in profits, while wages as a percent of GDP have fallen to all-time lows. Even with unemployment in the 4% range, workers hardly have any wage bargaining power. It isn’t clear how tax cuts would filter down to the pockets of workers.

Takeaway: It isn’t a dirty secret that tax reform could be a huge boost to the economy. But can the Trump White House get out of its own way to actually make it happen? What happens if tax cuts for corporations just go to (wealthy) shareholders, instead of the employees of those companies?

Other Links and Notes

Millennials: Scrappier than you give them credit for. “There is a common misconception that millennials are workshy. The Global Shapers Annual Survey 2017 shows that young people are, in fact, very career orientated. When asked to name the most important criteria when considering job opportunities, salary came out on top, followed by a sense of purpose and career advancement. Only around 16% said they are willing to sacrifice career and salary to enjoy life. To underline the point that young people are not lazy, the survey found that the vast majority of respondents (81.1%) would be willing to move overseas in order to advance their career.” (5 things we learned from one of the world’s biggest surveys of young people; Callum Brodie, Word Economic Forum)

Passive investing has been called worse than communism. That’s… extreme. But a case is made against the shift to simple index tracking. “Like climate change, the forces driving investors to passive investing may be too far along to turn back. The velocity toward index-driven dystopia appears to be increasing.” (The Worst Case Scenario for Passive Investing – Part I; Stephen Gandel, Bloomberg Gadfly)

Costco’s ecomm business has grown, but is it doing enough to fend off the Amazon monster? “Half of Costco’s shoppers are Amazon Prime members, Kantar Retail says, up from 14 percent five years ago. Sharing too many of the same subscribers could be risky, since Planet Retail RNG analyst Graham Hotchkiss says Amazon now offers many bulk-size goods at prices that rival Costco’s. And Amazon’s pending $13.7 billion deal to buy Whole Foods Market Inc. will give it a firm foothold in groceries—the primary reason people shop at Costco, according to Barclays’s Short.” (Costco Is Playing a Dangerous Game With the Web; Matthew Boyle, Bloomberg Businessweek)

St. Louis Fed chief James Bullard, skeptical of the value of the Philips Curve. “For monetary policy purposes, we should not base our notions of what will happen with inflation solely on ideas related to low unemployment. While we certainly want to keep an eye on inflation readings, there seems to be no strong case for being pre-emptive with respect to inflation simply because the unemployment rate is low.” (Does Low Unemployment Signal a Meaningful Rise in Inflation?; James Bullard, Federal Reserve)

Weekly Wrap: White House vs. Paul Ryan on Tax Reform; Low Inflation Ties the Fed in Knots; Fed Chair Rumormongering

This was first published on Facebook. To get the Weekly Wrap hot off the press, please like us on Facebook.

The Life and Death of Tax Reform

The White House will get its tax cuts. The catch: they won’t do anything to boost the economy.

That’s according to a Bloomberg survey of economists on tax reform.

With all the other distractions, shall we say, surrounding the White House, just getting to tax reform could take time. But over the past few months, there have been proposals from both the White House and from Paul Ryan and Kevin Brady (R-TX), chairman of the House Ways and Means Committee.

Both plans have a few of the same goals – cut taxes, repeal the estate tax, boot the alternative minimum tax, scrap the Obamacare investment income tax, and simplify the tax code. But a massive canyon exists between the substance and style of the two proposals.

Let’s start with the White House plan:

• Repeals “targeted tax breaks that mainly benefit the wealthiest taxpayers,” including the tax deduction on state and local taxes
• Cut corporate tax rate
• No plans to raise revenue

The Ryan/Brady plan intends to make similar deep cuts, but actually looks to close that funding gap:

• Get rid of all tax deductions. Except the most basic personal exemptions. And deductions, credits, and the break for mortgage interest and charitable donations
• Replace the corporate tax with a tax on business cash flows, which could raise some revenue

Two sides, same coin? Hardly.

Alex Raskolnikov, a tax professor at Columbia University, wrote recently that both tax plans could have huge budgetary consequences. He notes, “…[N]o plausible economic forecast would project enough growth to offset the $3-$4 trillion shortfall resulting from the rate cuts in either version of the business tax reform.”

Rasknolnikov does argue that the Ryan/Brady plan is more defensible than the White House plan, however. A few tweaks could put the plan from the lower house on more solid fiscal footing than the one-pager that came out of the executive branch.

Winners, meet losers

Ryan/Brady will turn to a border-adjustment tax to raise additional revenue. In short, this taxes importers and gives tax relief to exporters. WalMart, which imports basically all of those toys and underwear on its shelves, is vehemently against the Ryan/Brady plan. Boeing is vehemently for the plan. The plane manufacturer does most of its business outside of the United States, and would see a huge cut to its tax bill.

Raskolnikov argues for swapping the border-adjustment tax (which could be illegal under WTO rules) to a corporate VAT tax. The two tax strategies aren’t all that different. But the VAT is already used in other countries, which would help the United States avoid WTO litigation (or a trade war). Raskolnikov’s alternative strategy would also include a tax credit for lower-income households, who spend the largest part of their income on imported goods and would be the most hurt by a tax increase on imports.

But as both plans are currently written, the gap between tax revenue and cuts will widen, increasing both the deficit and debt. What happens then? Interest rates could spike as the government has to issue more debt to cover that lost tax revenue.

Remember that argument that government spending crowds out private investment? The same effect happens here, as private businesses would find it more expensive to borrow money to invest in new facilities or equipment.

This analysis of tax reform is 470 words longer than the White House tax proposal

To be sure, it is still the early innings in the great tax reform ballgame. Ryan/Brady is getting plenty of pushback on the border-adjustment tax, while the VAT is anathema to Republican tax orthodoxy. The White House plan has not been formally expanded upon since its April rollout. And most importantly: Can the White House build enough political capital to actually pass tax legislation.

The economists surveyed by Bloomberg were given a window until November 2018, but there is a long road until they are proven right. As Politico’s Rachel Bade and Bernie Becker recently noted, “Rewriting the tax code will be just as difficult as health care — maybe even more so.”

Time, even in the White House, waits for nobody.

Disinflation is Running Hot

It is looking less and less like the Federal Reserve will hike interest rates anytime soon.

Last week, we discussed the connection between low inflation and low wage growth. The Federal Reserve argued just the same when they released their July meeting minutes this week.

The July minutes show that more members of the Fed’s policy-making committee seem to be coming around to the fact that inflation is likely to remain low. Investors think this is a signal that the Fed Funds Rate, the central bank’s benchmark interest rate, will stay put at 1.25%.

When economic models stop being polite and start getting real

What does this mean? The Fed wants to run the economy hot for longer. Low interest rates should allow businesses to borrow and expand more cheaply. This would spur hiring (it has, for 80-something consecutive months), ultimately leading to wage growth as employers battle it out for workers. Those higher wages must get passed along to consumers in the form of higher prices. Hence, inflation.

But there has been something askew in the Phillips Curve – the economic model that says that a decrease in unemployment should lead to an increase in inflation. If inflation is the ultimate goal for the Fed, the central bankers will keep rates low until inflation kicks in.

We all want higher wages, right? The Fed’s voting committee wants that for you too. You might have to wait a bit longer to see a bump in your paycheck, however.

In other Federal Reserve news…

New York Fed President William Dudley gave a sweeping interview to AP this week.

Somewhat interesting: Dudley seems to take a more hawkish view on inflation than many of his fellow committee members. The NY Fed head would still consider a rate hike at the end of the year. He is in the minority here, however. According to the Chicago Mercantile Exchange’s FedWatch tool, the markets think there is about a 42% chance of a rate hike by December.

More salacious news: Dudley weighed in on the president’s upcoming decision of whether or not to name a new Fed chair.

If you haven’t heard, the White House will have the opportunity to appoint a new Federal Reserve chair in 2018. Janet Yellen has served in the role since 2014. According to PredictIt, Yellen and Gary Cohn, the director of the president’s National Economic Council, are running neck and neck.

Dudley on Cohn

I don’t want to evaluate the various candidates for the Federal Reserve, except to say that I think Gary is a reasonable candidate. He knows a lot about financial markets. He knows lots about the financial system. I don’t think you have to have a PhD in Economics, which I have, to be a Chair of the Fed or Governor or a President of one of the Federal Reserve Banks.

I think it’s important to have a committee that has diversity. That has different backgrounds and perspectives. So I think Gary’s a reasonable candidate.

You wouldn’t be alone if this struck you as unusual, but really, what is the benchmark for what normal anymore?

Regardless, the president has a choice to make. He has in the past noted that he is a “low interest rate person.” Yellen is noted as a dove, erring on the side of lower rates. But the president also likes to have his own people in powerful positions. That would seem to tip the scales toward Cohn.

Though the calculus may have changed this week: after the president’s combative news conference following Charlottesville, Cohn was “somewhere between appalled and furious,” according to Axios.

Other Links and Notes

We noted that tax reform is difficult. It is also causing massive uncertainty for businesses. “‘In the details of executing simplification, there are going to be big winners and big losers, and we would not want a client to execute planning that moves them from a position of being neutral or a winner to a position of being a loser,’ Becker said. ‘There just isn’t the specificity we need to do meaningful planning.’” (Biggest Tax Advisory Firms in the Dark About Trump Reform Plans; Emily Stewart, The Street)

Rick Rieder of BlackRock is also down with the tech-driven deflation thesis. “Tech disruption is having an epic impact on U.S. consumption, driving one of the greatest supply-cost revolutions of all time. In short, new disruptive technologies in demand by consumers are a powerful disinflationary force holding down prices. A large part of what we’re witnessing here could be described as the “Amazon effect,” as the e-commerce retailer is disrupting large swathes of the goods economy. But this disinflationary dynamic isn’t limited to e-commerce.” (The truth buried in weak inflation data; Rick Rieder, BlackRock)

Are credit cards are the new subprime home loans. I say no, but that’s another conversation for another time. “The proportion of overall debt that was delinquent, at 4.8 percent, was on par with the previous quarter. However a red flag was raised over the transitions of credit card balances into delinquency, which the New York Fed said ‘ticked up notably.’ Loosening lending standards have allowed borrowers with lower credit scores to access credit cards, Andrew Haughwout, an in-house economist, said in the report. (Americans’ debt level notches a new record high; Jonathan Spicer, Reuters)

Jeff Bezos is tapping into the bond market, because why not? “Amazon has proved itself much more than Tesla, but it, too, is selling investors on hopes and dreams more than reality. Investors who buy 30-year and 40-year Amazon bonds are basically getting equity in the company without the upside should the company continue its path toward world consumer dominance.” (Amazon Peddles Bonds With an Equity Story; Lisa Abramowicz, Bloomberg Gadfly)