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Is it finally time to say goodbye to Goldilocks? Since the mid-1990s, US central bankers have come to pride themselves on their ability to prepare just the right sort of monetary porridge: not hot enough to fuel inflation nor cold enough to stall the economy, but just about right.
Purists have long quibbled that this narrative was a bit of a fairy tale. Thanks to statistical quirks, such as quality adjustments and a falling labour force participation ratio, some of the success in containing unemployment and inflation at the same time has been more apparent than real. Still, a single index of economic misery that combines these two factors produces healthy readings by historic standards.
The problem is that this has as much to do with good luck as good monetary policy – notably the pick-up in productivity growth of the late 1990s, which helped contain consumer prices. Compared to nominal gross domestic product, money of zero maturity – a measure of money supply – is still 35 per cent higher than in 1995. Such measures have their limitations. But it is no surprise that all this excess liquidity is at last showing up in the prices of goods and services, as well as assets.
As a senior Federal Reserve official admitted earlier this month, interest rates stayed too low for too long during the current expansion, fuelling speculative activity, notably in housing. Bears grumble that the housing slowdown will complicate the task of serving up the temperate slowdown most equity investors expect. In contrast, optimists note that consumers are showing few signs yet of panicky retreat – perhaps because wages are finally starting to benefit from a tighter labour market.
There is still the question of how long US households, chronically short of savings, will keep spending. But it rather misses the point. While the recent slowdown in productivity growth partly reflects cyclical factors and sectoral shifts, it also hints at some liquidity-driven capital misallocation. That suggests weaker growth and inflationary pressures might linger – offering little hope for Goldilocks to return any time soon.