Fed officials use the term “self-sustaining expansion” to describe an economy in which household spending and capital spending are sufficiently healthy to produce good growth without monetary or fiscal stimulus. The employment report for February strongly suggests that is where we are now in this cycle. That followed a Beige Book that reported labor shortages and building wage pressures in almost every Fed District, and was followed by a Barron’s cover story on the implications of scarce labor.
Yet, the FOMC is satisfied with a policy they call accommodative. They are accommodating above-trend growth at a time when the economy is at full employment and fiscal policy has become more stimulative. Some FOMC members even call financial conditions exceedingly easy. Even if the fed funds rate is raised 25 basis points next week, it will still be “ridiculously low for this stage of an expansion”, according to a quote in Barron’s.
Where are the bond vigilantes? I am not convinced they ever existed, but if they did, we need them now. They have been in a coma induced by years of central bank largesse. If they were to awaken, a 3% yield on the 10-year Treasury would be merely a rest-stop on the way to 3 1/2%.