October 2017

The myth of “low inflation” debunked

Yellen and the Fed seem surprised that inflation remains below target even with unemployment at historically low levels. With that view coming from the Fed we get pieces with “novel” titles such as The New Fed Team Will Inherit Inflation Miss That’s Mystifying Yellen Nobody seems to know why there’s no US inflation Even absurdly titled papers as one recently presented by former Board Member Tarullo: Monetary Policy Without a Working Theory of Inflation The list is almost endless… Why is that a concern today? Why wasn´t it a concern in the eleven years from 1994 to 2005. In the… Read More

Share

NGDP Forecast Update: Start of 2018Q4 forecast

We’ve entered the year’s last quarter. This means we abandon the old forecast, and start booking a new vintage: the 2018Q4 forecast. We’re trying to forecast how much nominal income growth there’ll be in one year’s time. It is now Q4 of 2017, thus Q4 of 2018 is the number we seek to hit. The new forecast is coming in only a bit ‘lower’ than the previous vintage. About 4% vs about 4.1% in the old vintage. Keep in mind the gap between in forecast vintages in the plot above, does not imply a change in outlook. It’s simply a… Read More

Share

Week ending Friday October 6th 2017 A strong week for markets with equities, USD, copper and bond yields all moving up. Markets are very much looking through any weather-related damage to the economy in 2017Q3. Markets Equity markets are still excited by the prospect of a juicy 2017Q3 earnings season starting next week, as most firms will feel the boost from the weak USD in the quarter versus the prior year and prior quarter. This tailwind will unwind eventually and mean little in the longer term – and could turn into a headwind if recent USD strength continues. Short-term bond… Read More

Share

The employment report – Hurricane despair

It´s likely that the hurricanes that battered parts of the country were responsible for the first negative payroll in more than seven years. However, bars and restaurants will reopen cars vans and trucks and other durables replaced, so the coming months are likely to show a bounce back from the hurricane’s effects and a stimulus as rebuilding gets underway. Bad ideas, however, never die. Below examples of typical comments that reflect the Fed´s views “From our perspective, there is roughly only 1.3 individuals for every job opening and wage gains are in the pipeline with some inflation trailing behind.” “Sub-4%… Read More

Share

The worldwide bond market tops $100 trillion, and we live in a world (as we are incessantly told) of global capital markets.  All told, there is more than $217 trillion in global debt outstanding, and that figure rises by many trillions every year, reports the Institute of International Finance. The U.S. Federal Reserve, as widely reported, plans to start reducing its balance $4.5 trillion sheet, often described as massive or even “yuge.” But it turns out due to rising piles of U.S. paper cash in circulation, there is not that much bond-selling the Fed can do. Indeed, as noted by… Read More

Share

By embracing the wrong framework, the Fed has difficulty understanding low inflation

Low inflation has bothered the Fed no end. Two years ago, Yellen “crunched” inflation in a speech titled Inflation Dynamics and Monetary Policy. She concludes: I expect that inflation will return to 2 percent over the next few years as the temporary factors that are currently weighing on inflation wane, provided that economic growth continues to be strong enough to complete the return to maximum employment and long-run inflation expectations remain well anchored. Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by… Read More

Share

Fed has become tiresome

Regarding inflation, “temporary”, “transitory”, is the defining idea. Now, however, the Fed confesses that it´s understanding of inflation is imperfect. …my colleagues and I currently think that this year’s low inflation is probably temporary, so we continue to anticipate that inflation is likely to stabilize around 2 percent over the next few years. But our understanding of the forces driving inflation is imperfect, and we recognize that something more persistent may be responsible for the current undershooting of our longer-run objective. Accordingly, we will monitor incoming data closely and stand ready to modify our views based on what we learn.… Read More

Share

Week ending Friday September 29th 2017 The last week in September capped one of the most stable months on record for US-focused markets, with the S&P 500 posting the lowest volatility on record by some measures. Intuitively, our nominal GDP forecast was steady through September, reflecting both the importance of equity prices in the forecast as well as stability in other market inputs. Markets There wasn’t too much to note from markets for the week. Shares rose a bit, the five- and ten- year yields rose about 8 basis points, WTI oil gained 2% while the dollar index was about… Read More

Share