Errors of monetary policy have established an inflation-recession reasoning about the growth patterns of American economy.

The good part is that such reasoning explains the error and points the way to avoid it.

The error stems from an old axiom of monetary theory positing that recessions and inflations are created by maintaining monetary restraint (stimulus) past the point where the economy needs it.

Hence the policy advice for avoiding another U.S. recession: Don’t do the monetary overkill.

That, however, is easier said than done. The difficulty here is twofold. The monetary authority does not know with a great degree of certainty where the economy is at the point when it is making a policy change – and it knows much less where the economy will be when the policy change begins to affect economic growth.

Dogmatic monetarists have, therefore, concluded that policy makers are flying blind. Their next step was to advocate money supply growth rules instead of discretionary policy changes.

That advice was tried and tested. And the evidence showed that the monetary growth rule was unstable and ineffective, leaving the U.S. central bank (the Fed) with its best guesses to pinpoint the position of the economy and assess (long and variable) lags in the effect of policy changes.

The Fed is not flying blind

That old debate is settled, but the problems of “guesses” and “foresight” remain.

I, however, believe that the Fed has the means to make good “guesses” – i.e., very sound assumptions – to guide its policy decisions.

The Fed’s 12 federal reserve banks keep a close watch on their districts economic and financial conditions. Their detailed business surveys are produced eight times a year and submitted to the Fed’s policy setting body.

In addition to that, there are very useful monthly surveys published by various business organizations covering a broad range of activity and price indicators.

We now have the most recent surveys showing a slowly expanding U.S. economy, with a moderately growing labor demand, no excessive inventories, and roughly stable prices.

So, the Fed is not “flying blind.” Its own business surveys, called “beige books,” and similar data gathered by private businesses, give a good idea of the actual state of economic activity, prices, and labor markets.

And all that survey evidence suggests that there is no need to rush with further measures of credit restraint. The economy has slowed toward its long-term growth potential (a GDP growth in the range of 1.5% to 2%), inflation is not accelerating, and unit labor costs growing at an annual rate of 3% in the first half of this year are down from a 7% growth during the same period of 2022.

U.S. should step up balanced trade with Asia

Now, waiting for the slowing economy to tame inflation, the U.S. could benefit from a brisk economic activity in Asia, where India, ASEAN (a group of ten Southeast Asian economies) and China are expected to grow this year at average annual rates ranging from 4% to 6%. But how much the U.S. can sell to those countries depends on Washington’s ability to keep reasonably free trade flows with the part of the world strongly focused on economic development.

India is Asia’s economic growth leader. Delhi’s 7% GDP growth in the first half of this year is based on high government spending, large public sector investments and a strong household consumption. Whether India’s fast-paced economic growth can be sustained will depend on how its high and volatile inflation (6%) and a budget deficit of 8% of GDP will be managed.

The ASEAN economy is expected to grow 4.5% this year, and to accelerate to 5% in 2024. Based on current growth trends in the group’s three largest member countries (Indonesia, Thailand and Vietnam), those estimates could be overshot as a result of increasing intra-area trade and a rapidly expanding commerce and finance with China.

The irony is that China’s stagnant foreign trade did nothing for its GDP growth in the first nine months of this year. But Beijing’s strong domestic demand made a positive contribution to economic activity in its ASEAN trade partners. Households’ consumption has been the economy’s main driver, accounting for 83% of China’s 5.2% GDP growth during the January to September period. That is set to continue, and the IMF forecasts that China will contribute one-third of this year’s 3% world economic growth.

China’s strong fundamentals – stable prices (0% inflation in September), sound public sector finances and a steady current account surplus – allow a safe stimulus to accelerate economic growth with increasing private consumption and investment spending.

And here is an Asian message to America: With a large and open external sector (about 30% of GDP), the U.S. should extract more growth from its Asia trades at a time when domestic demand is taking a hit from high credit costs and an overextended fiscal position.

America’s “pivot to Asia” should have a very strong economic dimension.