June 2018

“Construction in the residential market remained solid, though the shortage of labor and intense price pressures for building materials continued to act as headwinds.” The above paragraph is from the May 30 Beige Book, the Fed’s periodic wrap up of economic conditions in its 12 districts. Can you guess which of the 12 districts the Fed is describing?  Dallas, perhaps? No, the above is the Fed’s most-recent synopsis of housing markets in the Fed’s San Francisco 12th District, which is the West Coast. What is odd about the Fed’s resolute myopia is that there is a broad, bright-red common thread… Read More

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Keynes; “The difficulty lies, not in the new ideas, but in escaping from the old ones”

An old idea never relinquished is the one that sees inflation as a cost phenomenon, or the result of “cost-push.” A recent op-ed by Peter Hooper, managing director and chief-economist of Deutsche Bank Securities, and more significantly a 26-year veteran of the Federal Reserve Board in Washington, DC, provides a good illustration. According to him, “the Trump administration doesn’t seem concerned about this. It has taken at least six actions that have either actually or potentially boosted inflationary pressures. As a result, it has risked making our next economic downturn more severe.” The first is the “classic” Phillips-Curve reasoning: Historical… Read More

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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

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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

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Week Ending Friday June 1, 2018 Market movements last week implied modestly lower NGDP growth in the coming year. Our market-driven forecast, which we use to cut through the noise and detect the meaning of aggregate market moves, fell from 4.0% to 3.9%, Thursday-to-Thursday. This small move lower reflected lower copper and oil prices, a stronger dollar, lower stocks, lower 5-year TIPS spreads and a more gently sloping yield curve. The 5-year yield fell from 2.82% to 2.68%, and the two-year from 2.5% to 2.4%, while shorted dated bonds were little changed. There were potentially important data releases last week,… Read More

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