September 2017

What have they done?

A frequent argument made by FOMC participants is that the Fed cannot wait too long to raise rates because that would increase the chances that the economy would “overheat”, pushing inflation above target. Two examples: Yellen (2015) If the FOMC were to delay the start of the policy normalization process for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession. Rosengren (2017) Given the hot job market,… Read More

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How long does “temporary” or “transitory” last?

Yellen has made her position (shared by others at the FOMC) clear: First, she is somewhat puzzled by the inflation data. Second, that bewilderment will not deter them from keeping to their established “hike path”. Interestingly, two years ago she delivered a speech, which was all about inflation, in fact setting the foundation for beginning the “tightening” cycle, the first move of which took place three months later, in December, and was almost immediately temporarily “aborted” (remember Stan Fischer´s “4 rate hikes for 2016?) Highlights from the speech: “Inflation Dynamics and Monetary Policy” Policy Implications Assuming that my reading of…...

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NGDP Forecast Update: Holding Above 4%

Despite all the headlines and data releases in September, the near-term outlook held quite steady since our last update, with the latest reading for our 2018Q3 NGDP forecast around 4% after rounding. This means the economy is set to be a little less “cool” in 2018 than 2017, but not by a whole lot. There’s been a tiny drawdown, about 0.05 percentage points since last week, but such a small move is “decimal dust” in the world of macro, and is really only noticeable because the forecast was glued to 4.1% for most of the month. New GDP and Gross…...

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The GDP report: An alternative take

Some showed a “positive spirit”: From CNBC: Growth last quarter was the quickest since the first quarter of 2015 and followed a 1.2 percent pace in the January-March period. Economists had expected that the second-quarter GDP growth rate would be unrevised at 3.0 percent. With GDP accelerating in the second quarter, the economy grew 2.1 percent in the first half of 2017. Still, economists believe growth this year will not breach President Donald Trump’s ambitious 3.0 percent target. The fact is that the economy has been in the doldrums for the past 11 years. The “ambitious” 3% growth was the…...

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Questions for U.S. monetary policy Is U.S. economic growth poised for a rebound in the second half of 2017, as compared to the first half? Is the downside inflation surprise in the first half of 2017 likely to reverse in the second half of 2017? Will continued strong performance of U.S. labor markets put upward pressure on inflation? • The answer to all these questions: “Probably not.” And concludes: Recent data indicate that U.S. real GDP growth remains consistent with the low-growth regime of recent years. U.S. inflation has surprised to the downside in recent months, and the surprise is…...

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Durable Goods Orders: In “stall speed”

What makes Durable Goods Orders a “high profile” indicator is that it can foreshadow significant changes in economic activity sooner than other statistics. That´s because it is about production that will take place in the months ahead. It is important to keep in mind, however, durable goods orders are highly volatile month-to-month due, in large measure, to sudden large changes in orders for defense goods and aircraft. In order to get a better reading of demand in the business sector we must strip those volatile components out. Doing so, we get a better gauge of consumer confidence. The 65% of durable…...

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Yellen is Stunned!

In her speech today, Janet shows she has no idea what drives inflation: Key among current uncertainties are the forces driving inflation, which has remained low in recent years despite substantial improvement in labor market conditions. As I will discuss, this low inflation likely reflects factors whose influence should fade over time. But as I will also discuss, many uncertainties attend this assessment, and downward pressures on inflation could prove to be unexpectedly persistent. My colleagues and I may have misjudged the strength of the labor market, the degree to which longer-run inflation expectations are consistent with our inflation objective,…...

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The universal constant

Every few months after the FOMC Meeting, the Fed publishes the Summary of Economic Projections (SEP). An important component of the SEP is the long-run median of the FF rate, real growth rate, unemployment rate and inflation rate. Those are the rates the FOMC expects will prevail in the long run, or the rates towards which the economy will converge. The charts compare the long-run median with the ongoing rates for those variables. It´s notable that the rates expected to prevail over the long run have been systematically reduced. What is behind this one-way revision? Take, for example, the unemployment… Read More

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Low IQ central bankers

A good example of one is John Williams: “My own view is that it has been not that baffling,” Mr. Williams said, referring to low inflation. He noted that prices in some sectors such as health care and cellular services have been hit by downward movements, and that prices typically reflecting developments in the economy have been rising. “With a strong economy, history teaches us that inflation tends to move up,” he said. Mr Williams thinks inflation is a price phenomenon. Relative prices are always moving. Some prices fall while others increase. That´s the signaling nature of prices. Inflation, however,…...

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Week ending Friday September 22nd 2017 The FOMC meeting dominated the week. Although the market felt that policy had been tightened a little more than expected as bond yields and the USD rose, it wasn’t a big deal. Equities were flat. The bigger story was really quite dovish for monetary policy. As well as lowering the “normalized” interest rate level Janet Yellen revealed doubts about the Phillips Curve. Inflation wasn’t picking up as theorised by the Fed orthodoxy and, for once, transitory factors weren’t blamed. Perhaps “our understanding of the forces driving inflation is imperfect”, she admitted. And if the…...

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