November 2017

What does the Fed really want?

It wants to establish a new monetary policy framework. Recently, several presentations have hammered on this point. In a recent speech, Chicago’s Charles Evans explains: Specifically, I will talk about Delphic communications as those associated with a well-functioning, well-understood monetary policy framework. A foundation for these communications is a variety of state-contingent responses to economic developments that are well understood and well expected by the public. I’ll refer to Odyssean communications as those arising when unexpected events expose weaknesses and shortcomings in a Delphic framework. In such times, the need for outcome-based policies is paramount, and policymakers may be compelled… Read More

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Bond markets continue to flash a warning

Week ending Friday November 17th 2017 A busy week in data but no major signals. Markets were volatile. The USD fell partly due to potential tax reform negatively affecting the deficit and partly due to EUR strength. The grinding flat of the US yield curve continued as the 10yr less 2yr spread dropped towards 60bps from 75bps. Short rates continue to climb higher, but are not budging longer rates. Monetary offset coming soon to the US? US politics was mostly center stage as tax cuts made more progress through Congress but with little clarity on related expenditure cuts. Financial engineering…...

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No sustained rebound in industrial production

Industrial Production benefited from a hurricane rebound in October 2017, rising 2.9% above October 2016. That is the highest year over year growth rate since January 2015. Note that from late 2014 to March 2016, industrial production was contracting, remaining at close to that low level until November 2016. The election certainly changed perceptions, at least for a while. The favorable base comparison, however, will soon begin to wane. The fact is that industrial output is now about even with the peak registered in November 2014, and about the same level obtained just before the end of the previous cycle,…...

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Retail Sales indicates the economy is dormant

Charles Evans of the Chicago Fed is downbeat on inflation, but upbeat on economic activity: The real economy in the U.S. is on solid footing, and I expect this momentum to carry forward into 2018. For some time now, activity in the U.S. has been led by solid gains in consumer spending; and more recently, growth in business capital spending has picked back up as well. With healthy labor markets and much improved household and business balance sheets, the fundamentals for continued solid growth in 2018 look pretty good. The news on inflation, however, has not been as good. Retail…...

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“Low” Inflation is neither “transitory” nor “mysterious”

In a speech today, Chicago Fed president Charles Evans said: Inflation has been too low for many years Indeed, inflation has underrun our target throughout most of the post-crisis period. Core inflation did briefly reach target in early 2012, aided by the pass-through of earlier increases in energy costs, but it soon retreated. In the summer of 2016, core inflation rose to just under 2 percent, but it then fell sharply last March and has remained in the 1.3 to 1.5 percent range since then. Many economists subscribe to the view that this latest drop in core inflation simply reflects…...

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Faulty, but dangerous, reasoning

From “Fed-watcher” Tim Duy: The Federal Reserve believes the economy currently operates close to if not a little beyond full employment. The unemployment rate fell to 4.1% in October, well below the Fed’s longer run estimate and the 4.4% low of the last cycle. And note the broader U-6 unemployment rate, which includes measures of underemployment, fell to 7.9%, the low of the last cycle. By these metrics, conditions are fast approaching those the late-90’s. I believe the economy will sustain enough momentum to hit that point within the next six months. We do not have much experience with an… Read More

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Bond markets increasingly pointing towards a slowdown

Week ending Friday November 10th 2017 A quiet week in data and in markets. News on tax reform was also slightly disappointing. Trump was out of the country on his Asia tour and that kept politics out of the news. Yield curve trending to flattest since the GFC The most interesting market indicator by far has been the slope of the yield curve. Short rates have been consistently moving up while long rates have been drifting down – until a modest reversal on Friday. The 10yr less 2yr yield spread has been hitting a series of lows unseen since the…...

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The Fed´s “doom machine”

Tim Duy “terrorizes” in his “Fed will keep rate hikes coming”: Lots of news from last week, most of which supported the Fed’s current anticipated rate path of one 25bp hike in December followed by three more in 2018. The only potential obstacle on that path is the persistent weakness of inflation. But the ongoing decline in the unemployment rate, along with the promise of further declines in the months ahead, will dominate lingering concerns at the Fed regarding the inflation numbers. That´s exactly Yellen´s thinking: It’s important to try to estimate the unemployment rate that is equivalent to maximum… Read More

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John Williams suggests an alternative monetary policy framework

His argument: Potential output—the maximum amount an economy can produce over the long run—is an important indicator policymakers use to gauge a country’s current economic health and expectations for future growth. However, potential output can’t be observed directly, and estimating it is difficult, even with modern, sophisticated methods. Monetary policymakers are well advised to account for the perennial problem of uncertainty surrounding these estimates in devising and carrying out policy strategies. He suggests an alternative: In light of the reality that measuring potential output is very difficult despite the best efforts, it pays to avoid overreliance on these estimates when…...

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Anticipating disaster

A new Fed Chair is always required to show his anti-inflation credentials: Booming Labor Market Could Pose Challenge for Powell and the Fed – Janet Yellen’s prospective successor may find himself needing to restrain an economy that is too vibrant: The hardest job in central banking is to take the punch bowl away from the party just when people are starting to have fun. Jerome Powell, the Federal Reserve’s prospective chairman, could soon have to assume the role of sober killjoy as he is confronted with an economy and markets that are heating up. That could put Mr. Powell in… Read More

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