Taking Up Slack

Does our economy have too much slack?

Central to the debate about monetary policy is the question of economic slack. If there’s a lot of slack in the economy, Fed policy needs to be easy, and rates need to be low. If there isn’t enough slack, rates need to get back to normal, or inflation will pick up. Slack is a slippery concept—simple in theory, but hard to pin down. Policy errors in the ‘60s and ‘70s led to overly-easy policy and double-digit inflation. Nobody wants that!

Current data show a 5% output gap, based on the best estimates. But estimates can be revised. Based on the preponderance of the evidence, it’s unlikely that data on the economy will be revised upwards. Leading indicators are good, but not great. Capital spending by companies hasn’t been strong for a long time. And the employment/population ratio indicates that a lot of people could go back to work if the conditions were right.

So stagnant wages and low inflation will be with us for a while, even if the Fed is divided on the issue. Some may argue that rising asset prices are a form of inflation, but that is very different from rising consumer prices. Economists and market mavens will continue to look for patterns in the tea-leaves, but there’s nothing that indicates an overheating economy right now.

For the moment, low rates and good profit growth have given us a strong stock market. While tensions in Russia and the Middle East may make things interesting, they’re unlikely to make a significant dent in our economy.


Douglas R. Tengdin, CFA
Chief Investment Officer
Phone: 603-224-1350
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By | 2014-09-18T09:46:58+00:00 August 18th, 2014|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. –
Leave a comment if you have any questions—I read them all!
– And Follow me on Twitter @GlobalMarketUpd

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