Why is high employment and low inflation? Trump got it all wrong!

SMM5 22: just 2019, the United States FOMC Committee, St. Louis Federal Reserve Chairman Brad in Hong Kong on the U. S. economic and monetary policy speech. Brad said the Fed needs to be careful to maintain the expansion of the U. S. economy, if inflation continues to disappoint, the Fed rate cut is one of the options, the rate cut may help maintain the credibility of the inflation target. Fed policymakers may have gone "a little too far" to raise interest rates in December, he said, but it was too early to talk about a rate cut. On the Sino-US trade war, Mr Brad said farmers were very concerned about rising tariffs, but added that it could take months to see tariffs begin to affect Fed policy.

So far this year, US President Donald Trump and members of his cabinet have repeatedly expressed the hope that the Federal Reserve will cut interest rates to boost inflation. Affected by the global economic downturn, US inflation took a sharp turn in the second half of last year. The PCE price index favored by the Federal Reserve has already fallen below its target of 2 per cent. In March, the core PCE index has fallen to 1.6 per cent, the lowest in a year, at the same time. The unemployment rate in the United States has fallen to 3.6%, a new level in half a century, creating a strange phenomenon of low inflation and low unemployment. According to Phillips curve, unemployment and price index should be negative correlation, a country in the case of full employment, often hot economic development, prices rise faster, Phillips curve in the United States actually "invalid"!

In fact, low inflation in the United States is not that the economy is not good enough. In the first quarter, GDP in the United States reached 3.2 percent, exceeding market expectations. The job market was hot, and the unemployment rate fell again and again. The US economy is really not bad. Trump even boasted that he had created the greatest economy in history. In fact, low inflation in the United States has something to do with China. With the advent of the era of globalization, labor-intensive industries have flowed sharply to developing countries with abundant labor, such as China, with relatively low labor costs and more competitive product prices, while the United States occupies high-tech industries. Cheap Chinese-made goods are good news for the American people through large imports to meet domestic consumption, but an invisible problem is inflation, which was one of the reasons for the financial crisis in 2008.

Why would you say that? After 9 / 11, the Fed cut interest rates sharply, from 3.5% to 1%, and kept the 1% low for three years. It did not raise interest rates until mid-2004, but it was still too late, from July 2004 to July 2006, The Fed raised interest rates 17 times until the final subprime crisis broke out. Why did Greenspan not raise interest rates in time and let interest rates return to normal?. In theory, it is understandable that the short-term release of water from terrorist attacks, but why did he not adopt a policy of raising interest rates afterwards? instead, he stayed on the sidelines for three years. The reason is that Greenspan only focused on inflation, and when inflation did not rise, he did not raise interest rates. He dragged on until liquidity was rampant. He found that it was wrong. He hastily raised interest rates 17 times in a row, but failed to save the situation. The reason for the lack of inflation is also made in China, which joined the WTO in 2001.

There is really no need for the United States to manage low inflation. If interest rates are cut according to Trump's will, there will be excess liquidity. The US economy is normal and there is no need to release water for better GDP numbers. The GDP released from the water is, after all, just a trick of self-deception. The top priority for the United States is to return to neutral interest rates and normalize its balance sheet, which is about the world's confidence in the dollar exchange rate and confidence in the future economic development of the United States.