June 5, 2018

In a depression, recession calls are even harder to make

The flattening of the yield curve has generated heated discussions about a coming recession. Some like Bullard, for example, caution the FOMC´s appetite to raise rates. Others like Deutsche Bank, say yield curve flattening belies strong growth outlook for U.S: “The risks of overheating and inflation are much higher than the risks of a recession. And the irony of this discussion is that the low level of long rates, and hence, the flatness of the curve, is increasing the probability of overheating even further. Lower long-dated yields keep financial conditions loose, heightening the risk of an upsurge in growth, not… Read More


Houston, we have a (nominal) problem

Two instances of 3.8% unemployment and the corresponding wage, labor force participation and inflation. It doesn´t seem likely that the 3.8% unemployment today indicates anything close to full employment. The chart is illustrative. One implication is that Fed decisions shouldn´t be informed by the unemployment rate (relative to estimates of “natural”). For example, statements like the following: “Indeed, in the Fed’s forecast such tighter policy is necessary to edge up the unemployment rate and return the economy to a sustainable, non-inflationary path.” Are inexcusable, having no correspondence in reality. The Fed has direct influence over the nominal economy. In the… Read More