Don’t extrapolate 3% growth — & an aside on the dollar ‘policy’

This morning’s GDP release leaves fully intact the notion that underlying demand growth has quickened and is unlikely to falter until after the Fed has raised the funds rate enough to push financial conditions away from their current maximum stimulative position.

However, investors increasingly need to pay more attention to supply-side constraints, the most important of which is – increasingly – the tightening labor market.

In this note, I present some simple arithmetic documenting that the unemployment rate could easily hit a record low within the modern-era data, if GDP growth were allowed to run at 3% for the next couple years.

The point here is not that the unemployment rate is headed to 3%. The point, rather, is that growth will very probably have to be tamed to prevent this result.

Right now, there is little case for the Fed hitting the brakes hard.  For the next six months or so, they may remain tolerant of a forecast of slightly-above-trend growth.  What might change would be a meaningful turn higher of inflation, which is why I am on alert for that.

In any case, this would be an odd point in the cycle to start forecasting a sustained boom, although fixed income folks may want to forecast the implications of preventing one.

Separately, there is no dollar policy to go away. The Mnuchin minutia just allows IMF types and other intellectuals to talk about something, which they apparently like to do.   FH-180126