January 2018

Week ending Friday January 12 2018 The damned stock market just won’t stop rising. The yield curve is getting steeper too, and shifting higher, at least that was what happened this week. Markets continue to move in directions that imply an enduring increase in nominal growth. 5-year Inflation indexed bond spreads imply about 1.9% average yearly inflation over the next five years, about the same as the week before, but up from about 1.7% in early December. The dollar continues to plunge, with the “DXY” spot dollar index down 1.7% just this week. It’s not that the dollar is at… Read More

Share

Let´s avoid bad choices

Greg Ip discusses asset bubbles and how they could make Jerome Powell´s life at the Fed difficult: Any central banker watching the stock market today should get a queasy sense of déjà vu. A housing boom preceded the last recession. A tech stock bubble ushered in its forerunner. Today, stock and property prices are once again setting records, in absolute terms and relative to household incomes. That may leave the Federal Reserve and Jerome Powell, nominated to succeed Janet Yellen as Fed chair next month, confronting some agonizing trade-offs in the next year or two: What if low inflation calls for low interest rates but… Read More

Share

“Good mood” today meant “bad mood” in the 1990s

Misleading comments on the retail sales print: “Spending at U.S. retailers rose in December for the fourth consecutive month, capping the strongest year for sales growth since 2014”. “Definitely the consumers are in a good mood. The confidence is up. We’ve seen the labor market has been rather solid. “These are some positives going into 2018.” The chart indicates that retail sales follows on the heels of the encompassing nominal spending (NGDP) growth. While the Fed constrains the growth of NGDP, sales will also be “capped”. In the 1990s, up to the mid-00s, while NGDP growth averaged 5.5%, retail sales… Read More

Share

“Inflation wish”

Given how many are worried about “lowflation”, whenever a new data point is released you are likely to get absurd (and misleading) comments such as in the two examples below. “U.S. consumer prices rose in December, bolstering expectations that long-weak inflation is set to gain strength in the new year.” “For now, this report adds more weight to the idea that the run of soft numbers from March through July was ‘transitory”. To cap it “brilliantly”, this from Justin Lahart at the WSJ: Janet Yellen can take a victory lap about inflation on her way out as Federal Reserve chairwoman.… Read More

Share

“Inflation on demand”

The title was inspired by Olivier Blanchard´s presentation at the Brookings gathering on January 8 on “Should the Fed stick with the 2% inflation target or rethink it”. Blanchard proposes increasing the target to 4%. He also comments that Bernanke´s recent “temporary price level targeting”, which Blanchard calls “inflation when you need it”, so that real interest rates can be lowered when you are at the ZLB. That´s “Inflation on demand”! In addition to a higher inflation target, the Brookings gathering also discussed an inflation band (Rosengren), a price level target (John Williams) and nominal GDP targeting (Jeffrey Frankel). After… Read More

Share

Marvin Goodfriend has been nominated to the Federal Reserve Board, waiting for Senate confirmation. He comes to the Fed at a critical moment. Critical, because the Fed is in the process of rethinking its monetary policy framework. As Ben Bernanke said in a recent gathering at the Brookings Institution: Former Federal Reserve Chairman Ben Bernanke predicted that the central bank’s new leadership will study alternate regimes for monetary policy over the next year to 18 months. “There will be some pretty serious discussions” on policy frameworks at the Fed under the chairmanship of Jerome Powell, Bernanke said Monday. He said Powell… Read More

Share

A Bitcoin Story

The model, or imaginary world, I use to state what bitcoin is in an informative, but also simple way, goes like this: You have an endless space of mail boxes. Not literally endless, but so big that you never explore it. There’s money in some of the boxes, unlocked, but you don’t bother “checking mail boxes”, you’ll never find anything as there are too many to search. You have a limited token money unit that can be moved to the boxes, in theory, cheaply and fast. You never get to hold your money as physical bank notes, just move it… Read More

Share

Will a “couple”, a “few” continue into “several”, “most”?

It appears the view that “low” inflation is transitory is losing adherents. In the November FOMC, a couple of participants brought up the idea of alternative monetary frameworks. In the December FOMC, a “couple” became a “few” and two frameworks – PLT and NGDPT – were mentioned. November FOMC In view of the persistent shortfall of inflation from the Committee’s 2 percent objective and questions about whether longer-term inflation expectations were consistent with achievement of that objective, a couple of participants discussed the possibility that potential alternative frameworks for the conduct of monetary policy could be helpful in fulfilling the… Read More

Share

Week ending Friday January 5th 2018 There was no break in trends a far as markets were concerned. Equities hit new highs, bond yields rose gently across the curve and the USD weakened. These are all good signs for better nominal GDP growth ahead.  Our NGDP growth forecast for 2018Q4 jumped to 4.3% in the week after Christmas and would probably be higher now. We won’t see that as we always focus on four quarters ahead so the next NGDP Forecast release will be for 2019Q1. We (and markets and nowcasts) expect 2017Q4 to have been another quarter of decent… Read More

Share

The labor market is not strong. Like the economy, it is weak.

The “strong” labor market has been the excuse for the Fed to hike rates because according to their preferred model, inflation will soon pick up. They discount the fall in the labor force appealing to demographic factors. Population growth, however, has dropped to levels seen 20 years ago, before the immigration boom of the 1990s showed up in the 10-year population growth rate. What happened to the labor market after 2007 was not demographic, but was the result of the biggest monetary disaster in 60 years! It was following that event that American workers gave up looking for work that… Read More

Share