Pesenti: the difficult art of plotting the course of US economy

Milano, 27 February 2019
“Bright spots, dark clouds and fuzzy stars”: an effective title chosen by Paolo Pesenti, Senior Vice President and Chief Monetary Policy Advisor of the Federal Reserve of New York, for his speech about U.S. economy that concluded the “Economic Scenarios” series of SDA Bocconi’s MBA. The American economic sky cannot indeed be considered flat and dumb. Wherever you look, there are signs that need to be deciphered – some encouraging, others less so. The objective, after all, is to answer the most disturbing question: after years of growth, are the United States entering a new recession? It depends, Pesenti replies. On how you interpret the various indicators.

Many of them, in fact, can be read in two opposite ways. Unemployment, for instance, fell from 10% at the end of 2009 to 3.7% last November: this can indicate either a healthy labour market or a more “discouraged” and “neet” population. Over the same period, GDP grew by 2.3% on annual basis, largely helped by expansionary fiscal packages that cannot carry on for long and are already impacting on the federal budget. Finally, given low unemployment rates, equally low and stable inflation raises doubts about the classic relationship between these two economic dimensions and about the “condition” of the Phillips Curve.

That said, policymakers should navigate by the “stars”, i.e. the values of these and other economic entities that are considered “natural” or “desired”. But these stars are “fuzzy”, though – sometimes it is hard to identify them on the map and predict their path: “In short: real inflation is moving slightly above the desired one, growth above, then below the expected level and unemployment below for a while as well”, says Pesenti. But he warns: “Forecasts are always difficult: in 1964, Mick Jagger gave the Stones about two months...”.

No doubt, some dark clouds are coming – financial markets volatility, international trade tensions, forecasted slowdown in global growth. But they need not trigger storms. How can you explain, for example, that fundamentals hold strong even in financial turmoil? Again, there are different and even conflicting keys to interpretation: are markets overreacting? Or do they know better? The answer is open. Pesenti, in his pragmatic approach as central banker, relies on the time factor: patience, flexibility, data-dependency are key to sustainable prosperity.

SDA Bocconi School of Management