The term “Fedspeak” first entered the English lexicon during the reign of Fed Chairman Alan Greenspan.
The term was coined by an American economist and Princeton University professor Alan Blinder to describe what he called the “turgid dialect of English” employed by Federal Reserve Board Chairmen – specifically, their ability to make wordy, vague statements that leave economists and investors none the wiser.
Some of Alan Greenspan’s greatest hits on his “Best of” Fedspeak album are included below:
Risk takers have been encouraged by a perceived increase in economic stability to reach out to more distant time horizons. But long periods of relative stability often engender unrealistic expectations of it[s] permanence and, at times, may lead to financial excess and economic stress.
– July 2005
The members of the Board of Governors and the Reserve Bank presidents foresee an implicit strengthening of activity after the current rebalancing is over, although the central tendency of their individual forecasts for real GDP still shows a substantial slowdown, on balance, for the year as a whole.
– February 2001
[If you draw any meaningful conclusions from either of these statements… then congratulations: You have achieved native fluency in Fedspeak already.]
Removing the “non” from nonsense
The Fed’s penchant for employing its own particular brand of English when describing economic conditions, monetary policy and its other observations, have led to something of a cottage industry in analysing Fed statements.
There are hundreds, if not thousands, of economists, analysts and journalists whose job it is to parse these wordy statements into something digestible for those of us who don’t speak Fed.
The most important of these statements comes eight times a year from the Federal Open Market Committee (FOMC), which consists of 12 members. These are the seven members of the Board of Governors of the Federal Reserve, the president of the New York Fed, and four of the remaining 11 Reserve Bank presidents (who serve one-year terms on a rotating basis).
Once-In-A-Generation Bull Market ‘Almost Inevitable’ At This Point…
This is your opportunity to make a fortune from one of the largest explosions of wealth ever…
To understand the best way to play it, we have to go back to 1950s America…
Read the full story here.
FOMC meetings review financial and economic conditions and, critically, determine (and announce) monetary policy in response to recent and forecast financial conditions.
The Fed translators are essentially trying to determine what the Fed really thinks about the state of the economy, and how does this translate into monetary policy. The focus in recent years has been “when will the Fed next raise rates, and how fast will they raise them thereafter?”.
But whilst statements emanating from the Fed might be cumbersome and cryptic, statements from individual Fed Governors don’t have to be. In fact, there are plenty of times where a Fed Governor can provide simple, lucid observations – and when they do, they’re worth paying attention to.
A moment of clarity
John C. Williams, the President of the Federal Reserve Bank of San Francisco, recently made such observations in a presentation at Macquarie University in Sydney, Australia at the end of June.
Now, whilst his views are disclaimed as not necessarily being reflective of the Fed Board of Governors, the man has a seat at the table. He’s currently an “Alternate Member” for the 2017 FOMC, and is slated to be a full committee member for 2018.
It was the title of Mr. Williams’ presentation that caught my attention, “The Global Growth Slump: Causes and Consequences”.
The opening sentence of the short summary confirmed that further reading was warranted:
Demographic factors like slowing population and labor force growth, along with a global productivity slowdown, are fundamentally redefining achievable economic growth. These global shifts suggest the disappointing growth in recent years is a harbinger of the future.
You don’t even need a rudimental grasp of basic conversational Fedspeak to understand this: Mr. Williams tells it plainly. Global achievable economic growth is now lower than it was in the past, and will remain so in the future.
Mr. Williams points out that over the medium-term, the sustainable growth rate of an economy is equal to the sum of productivity growth and the growth rate of the labour supply.
In other words, if there are more workers working more efficiently (i.e. productively), then economic growth will flourish. And if the labour force isn’t growing fast, and it’s not increasing in productivity, then economic growth will stagnate. (We’ve also written about this.)
The Western world is failing on both counts.
Firstly, let’s take the labour supply growth side of the equation. Look at the rate of population growth in the chart below for OECD countries.
[The Organisation for Economic Co-operation and Development (OECD) is a membership of 35 countries worldwide, and represents a good proxy for the global developed world.]
The annual rate of population growth in the OECD has fallen from 1.5 percent in 1950, to around 0.5 percent today. And within the next 30 years, population growth is forecast to turn negative – that is, the population will start to decline.
So unless the Western world starts either having more children, or letting in more immigrant labour (unlikely in the current political environment), the fate of economic growth rests on increasing productivity growth.
Well, similar to population growth, productivity growth has been on a declining trend for decades.
Mr. Williams points at two measures of productivity. Firstly, labour productivity which measures the amount produced per worker hour. And secondly, total factor productivity (TFP) which measures productivity after accounting for capital invested and changes in the quality of the workforce. TFP is a means of capturing the impact of technology in productivity (although this is disputed by many economists).
The chart below shows the state of productivity growth and its longer-term trend clearly. It doesn’t look good.
The conclusion drawn is that those of us expecting any kind of return to pre-financial crisis rates of economic growth in the Western world are going to be sorely disappointed.
What’s more, the second conclusion here has to be this: Monetary policy cannot save us. It has been eight years since the U.S. came out of recession. The economy is practically in full employment.
Whatever help that low interest rates and money printing might have been in the aftermath of the crisis, its effectiveness has long since passed.
As Mr. Williams himself succinctly puts it:
As a monetary policymaker, I wish I could tell you that it’s within the purview of central banks to solve all this, that the answer lies in raising or lowering interest rates.
Reality, unfortunately, dictates otherwise.
Our long-term challenges are going to require the sort of long-term investments that fiscal policymakers—and private investors—have within their own toolkits: investments in education, job training, infrastructure, research and development…all the things that propel an economy and prosperity over the longer term.
If the future of the Western world is in the hands of the politicians who currently run it, then God help us all.
But the good news? With life expectancy continuing to increase, you’ll live longer to enjoy it!