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In an investor briefing published this morning, economist Ed Yardeni attacks New York Fed President and CEO Bill Dudley’s dovish take on the economy as being out of touch with reality:In his 1956 book, When Prophecy Fails, Leon Festinger chronicled the followers of a UFO cult as reality clashed with their fervent belief in an impending apocalypse. He coined the phrase “cognitive dissonance” to describe their behavioural disorder…That’s a fairly accurate description of Bill Dudley’s speech yesterday before the Long Island Association in Melville, New York.
In particular, he argues that Dudley—and maybe even the similarly cautious Fed Chairman Ben Bernanke and Vice Chair Janet Yellen—doesn’t see the writing on the wall; the economy is improving and there is far less reason to be thinking about further stimulus. Continuing dismissal of good data belies this belief in “impending apocalypse.”
His critique of Dudley continues:
He can’t deny that there is less slack as the unemployment rate dropped from 9.1% last August to 8.3% in February. Plenty of other indicators confirm that labour market conditions are clearly improving. However, rather than accentuate the positives, Dudley dismissed them: “In fact, had the labour force participation rate not declined from around 66 per cent in mid-2008 to under 64 per cent in February, the unemployment rate would still be over 10 per cent. Also, it appears that productivity growth has slumped recently. Although that means that a given amount of growth translates into bigger employment gains, it certainly is not an unmitigated good development…
The balmy winter weather most likely continued to boost economic activity during March. I’m not convinced that this means that activity must weaken during the spring and summer. There is plenty of pent-up demand in our economy to keep it growing at a solid pace over the rest of the year as long as the Fed doesn’t meddle with it again. Bill Dudley sees reality differently. One of us is suffering from cognitive dissonance. Time will soon tell.
Yardeni later notes that yesterday he voiced concerns about inflation “for the first time in a very long time.” He blames central banks’ multiple efforts to pump cash into the global economy, and wonders if central bankers can be as successful at averting reflation as they were at avoiding deflation. He elaborates in a separate blog post.