Dear Janet… A Memo From Millennials To The Fed

Millennials and the Federal Reserve have more in common than you may think, but not in a good way. The proof is (like everything else millennial) online. Google knows pretty much all of our secrets, which often filter into its autofill feature. Likewise, many people aren’t shy from voicing their opinions on Facebook. Both show similar public sentiment for young adults and the central bank. 

For example, “millennials are” autofills in Google to “lazy, the worst, dumb, screwed.” Type in “millennials can” and most autofills add an “apostrophe t” at the end along with “take criticism,” “afford homes,” and “grow up.”

Skim posts on the Federal Reserve’s new Facebook page, and the feedback’s even harsher. Zero Hedge put a long list together, here’s a few and a link to the fuller string:

“See… this is the problem – a bunch of arrogant suits who think they are smart enough to ‘run’ an economy. No group of people has the knowledge to manage the economy. Only a fool would think so.”

 

“The Federal Reserve could promote a strong U.S. economy by closing down.”

 

“No you don’t want to promote a strong U.S. economy, your organization is one of the single biggest causes of devaluing the U.S. dollar. You shouldn’t exist…”

Yep, swipe left for both millennials and the Fed. Despite their unpopularity amid the broader public, millennials’ importance is only growing as the largest generational cohort in the U.S. The Fed’s chance of maintaining its influence over the next half a century depends on how it can shape this cohort’s thinking on the institution’s ability to guide the economy. This is a tall order during a time when people continue to call the credibility of central banks around the world into question.

Even Former Chair Ben Bernanke’s latest blog post addressed Fed policymakers’ inability to forecast key economic determinants correctly over the past several years. A slew of FOMC members have provided the markets with hawkish comments over the last week, but does it mean anything?  Not really, if one follows the advice of the former chair: “Fed-watchers will see less benefit in parsing statements and speeches and more from paying close attention to the incoming data.” Full post here: http://ift.tt/2bqB1An

If we were to heed his advice and just look at “the incoming data”, we’d likely not sport the hawkish views of policymakers as of late. The real laggard of the Fed’s dual mandate of maximizing employment and achieving stable prices is the latter. The Core PCE Price Index was up just 1.6% y/y in June (the latest reading), still below the Fed’s 2% target. After resorting to unconventional policies including quantitative easing and near-zero interest rates, tepid inflation has created one of the largest quandaries for economists since the financial crisis. Most got the inflation call wrong.

There’s one demographic who views low inflation as a feature, not a bug however: millennials. In order for the Fed to restore and maintain credibility for the long-term, it must instill confidence in this generation that it can actually spur inflation expectations. As a millennial myself, here’s how to do it:

#1 – Understand the millennial experience: While our parents remember double-digit inflation during some periods growing up, we’ve only experienced low inflation. Since 2000 – when the youngest millennials started becoming adults – the Core PCE Price Index has averaged just 1.7% y/y. That compares to 4.3% y/y growth on average from 1965 to 2000 over the majority of baby boomers’ adulthood.

 

To put it simply, we’re not accustomed to high inflation because we haven’t seen it. Therefore, it’s much easier convincing our parents it will return because they fear it will climb like in the 1970s, requiring the subsequent harsh policy response from former Fed Chair Paul Volcker. It took him creating two recessions as a means to end stagflation. On the other end of the spectrum, we don’t want to live out Japan’s deflationary experience in the 1990s, a troubling situation the country still hasn’t been able to rectify. This is a tight rope to walk, which brings me to our next point.

 

#2 – Appreciate technology’s role in enabling deflation: Japan’s deflationary environment has proved so damaging to the country’s economy because its citizens continually expect prices to drop. Consequently, they save and delay spending, rather than stimulating the economy. We have a different situation in the U.S., however, one that is more familiar to millennials. We don’t necessarily put off spending with the expectation of future falls in prices. Rather, we seek out competitive prices.

 

In this case, it’s not that we are waiting for lower prices, but that the newer services economy is creating downward pressure on daily expenses by cutting out inefficiencies by the use of technology. Our parents couldn’t enjoy these benefits as technology wasn’t as advanced when they were our age.  Now the sharing economy, numerous apps, and crowdsourcing sites disrupt older business models and provide us with access to everything from transportation and music to movies and a place to stay that’s within reach financially.

 

To millennials, declining prices for consumers is a healthy development. The combination of a more tech and service-based economy – than our parents encountered in their early adult lives – encourages deflation. Either inflation should hold less weight in the Fed’s dual mandate, or the central bank needs to find a way to change our thinking.

 

#3 – Worry less about the financial markets: For better or worse, U.S. central bankers have been very careful to not spook the capital markets since they’ve commenced their tightening process. This doesn’t impact most millennials, however, who can’t afford to invest or are wary about the stock market after experiencing two financial crises. Millennials value transparency more, but the Fed continues to forecast a greater number of rate hikes than have materialized. The Fed could garner credibility by actually raising near-term interest rates at a frequency similar to what they’re projecting, or at least more than once a year. This would show the Fed means business, rather than catering to markets or worrying about the fallout from a stronger dollar.

Recent chatter about raising the target inflation rate could also help millennials believe in the prospect of higher inflation. Right now it’s anchored around the average they’ve experienced for most of their lives. Lastly, the Fed could show millennials they are in control of inflation by further cutting their long-run projections for the Fed Funds rate, no matter the consequences. Otherwise they’d have to take other extreme measures like further expanding the money supply, a move contrary to their guidance.

In sum, low inflation doesn’t worry millennials. In fact, we welcome it as we’re accustomed to a different economy than our parents, one in which disrupters that drive deflation thrive. Inflation is still engrained in the Fed’s framework, however, and the central bank has a lot of work to do in order to bake it into millennials’ expectations. This is one area in which they can’t look towards fiscal policy to help, especially when the cohort they have to convince overwhelmingly support candidates who promote deflationary causes, such as free education and health care.