August 2018

Jackson Hole 2018 – A time-travel

The theme was market power & monetary policy. That was in the minds of monetary policymakers more than 40 years ago, albeit not as a “force” that restrains wages and prices but as a “force” that enhances them. Today: — Two of the most important economic facts of the last few decades are that more industries are being dominated by a handful of extraordinarily successful companies and that wages, inflation and growth have remained stubbornly low. Many of the world’s most powerful economic policymakers are now taking seriously the possibility that the first of those facts is a cause of… Read More

Share

The importance of (nominal stability) locking in full employment for the long haul

Josh Bivens and Ben Zipperer just released a paper with the title above, minus “nominal stability”. The point I want to make is that if the Fed focuses on nominal stability (instead of any other target), the economy will likely operate much closer to “full employment”. The second point of the paper´s summary is: Equitable wage growth is linked with extended low unemployment. Since 1979, the only period of strong across-the-board wage growth occurred in the late 1990s and early 2000s, which was also the only period of extended low unemployment in recent decades. This coincidence of extended labor market… Read More

Share

Drive!

In U.S.: retail sales show midsummer muscle We read “U.S. retail sales rose a healthy 0.5% in July, showing the economy still has plenty of punch left at midsummer.” It´s all about gas prices and American’s penchant for driving! Once you subtract gasoline sales from total retail sales, consumers are not “showing muscle” or “punch.” In fact, they have “weakened”!

Share

Unit Labor Costs Falling Again In US

The Bureau of Labor Statistics reported Wednesday that unit labor costs fell 0.9% in Q2, and are up 1.9% from a year earlier. Unit labor costs are a drag on the Federal Reserve’s 2.0% PCE inflation target. Not only that, but unit labor costs are now up only 7.8% from nearly 10 years ago. The 2010s are not the 1990s, that now-forgotten Alan Greenspan-epic of low inflation and high productivity growth. However, it makes sense that the captains of industry invest in new plant and equipment when they think sales are forthcoming to validate the risk. True, the last 10… Read More

Share

The Fed´s unending search for “ammunition”

From Brad DeLong, who doesn´t think the economy is “solid”: Economic developments over the past 20 years have taught – or ought to have taught – the US Federal Reserve four lessons. Yet the Fed’s current policy posture raises the question of whether it has internalized any of them. The first lesson is that, at least as long as the current interest-rate configuration is sustained, the proper inflation target for the Fed should be 4% per year, rather than 2%. A higher target is essential in order to have enough room to make the cuts in short-term safe nominal interest… Read More

Share

NGDP Forecast Model Refresh – Taking the Forecast to “11”

We’ve recently overhauled our forecasting system. It was a good time to do this, as the recent GDP revisions could have altered the statistical relationships between NGDP and our market-derived factors. Updating the forecast system The starting point for our forecasting approach is to assume that Market Monetarism is true enough to be useful. We take it as given that a weak form Efficient Market’s hypothesis is in play, and that an important determinant of many traded financial market prices is the expected path of US nominal GDP. It is easy enough to point out that market prices assume certain… Read More

Share

Not a quiet Summer. The USD may have begun a surge. The DXY index seems to have broken out decisively to the upside above 96.0. The great post-Trump devaluation looks to be going into reverse. That devaluation was very welcome and brought to an end the late Obama-era economic stagnation. Trump may have been celebrating the strength of the USD when taunting the President of Turkey in his tweet announcing higher steel and aluminium tariffs, but not too long ago he was arguing for USD weakness. So, is the USD rising due to USD strength or RoW currency weakness? Obviously… Read More

Share

Sunday remininses: John Taylor on NGDP Level Targeting

In the first edition of his Macroeconomics textbook (1986), on page 137, we read: The underlying objective of policy is to maintain a steady or stable level of aggregate demand. The importance of a stable aggregate demand is one that has been recognized by most economists since the 1930s. Even economists who normally differ on other issues agree on the principle that it is desirable to maintain a stable growth of aggregate demand. The chart below is a replica of his chart (pg 136), discussing the appropriate response to an aggregate demand shock, induced by a rise in money demand… Read More

Share

The employment report: almost perfectly anticipated

All elements of the report came exactly as anticipated, wage growth, hours worked, labor force participation and the unemployment rate. The only surprise was the 56K below expectation payroll. However, that was more than “compensated” by the upward revisions for the previous two months. Once again, many generally referred to the report as “solid” or “strong”. I have previously argued against that view. Here, I want to concentrate “fire power” on some other misconceptions regarding the labor market. Recently, Chairman Powell said: “Everywhere we go we hear about labor shortages. But where’s the wage reaction? “ “So it’s a bit… Read More

Share

UK Monetary Policy: walking to stand still (eh? what?)

In Governor Carney’s prepared opening remarks to the press conference after the Bank of England’s Monetary Policy Committee unanimously agreed to raise its Bank Rate from 0.50% to 0.75% he made a couple of statements. There was the obvious and expected one: “With domestically generated inflation building and the prospect of excess demand emerging, a modest tightening of monetary policy is now appropriate to return inflation to the 2% target and keep it there.” Then the curious one: “Policy needs to walk – not run – to stand still.” Classic Carney. He is such a sharp cookie. He knew that the unanimity on… Read More

Share