November 2018

Regarding inflation and unemployment, monetary policy plays no role!

According to Robert Gordon writing in 2000 about the “fabulous decade”: Sometimes we are satisfied to find a single “smoking gun” or “silver bullet” that alone is powerful enough to provide an explanation of a macroeconomic puzzle. However, on this occasion we have no fewer than 12 separate and largely unrelated explanations of why inflation has been so low given unemployment, or why unemployment has been so low without igniting inflation. These 12 factors in the order discussed here are (1) falling real import prices through early 1999, (2) falling real oil prices through early 1999, (3) measurement improvements that… Read More

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“The Fed is doing an excellent job”

According to Jason Furman writing an op-ed for the WSJ: My @wsjopinion argues the Fed should pause in December—continuing the excellent job they have done. I do think being ahead of the curve on inflation is AN important consideration. If inflation rises too much it could be costly to reverse. Jay Powell thinks so too: …I am pleased to say that our economy is now close to both of those objectives. The unemployment rate is 3.7 percent, a 49-year low, and many other measures of labor market strength are at or near historic bests. Inflation is near our 2 percent… Read More

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Guided by “potential”: How has that worked?

Here´s Tim Duy writing for Bloomberg: The Economy’s Too Robust for the Fed to Bow to Markets – Growth would need to slow to around 1.8 percent before the central bank considers slowing the pace of interest-rate hikes. But will growth slow enough to ease what the Fed believes are underlying inflationary pressures? In general, central bankers believe the economy currently operates at or beyond full employment… Policy makers are, however, sufficiently concerned about the potential for overheating that they would prefer that unemployment didn’t drift much lower. From the perspective of the Fed, that means growth needs to slow to… Read More

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The Incredible Falling S&P 500

The big news in the last month or so has been the jarring volatility in the US stock market. At the time of writing, the S&P 500 is practically back to where it was a year ago and is down some -10% from the peak on 17 September, 2018. Despite the headline-making collapse in the share prices of internet companies such as Facebook, the Nasdaq is down “only” about -14% from peak, showing that the drop in the S&P 500 isn’t entirely due to the bear market in “tech”. The drop in share prices seems to be mostly due to… Read More

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Timothy Taylor Says Fed Will Resort to QE Early in Next Recession—But Will That Work?

Global interest rates are still near historical lows; indeed 10-year German bunds pay 0.49% interest, and 10-year Japanese government bonds pay 0.12%. The US pays more, a 10-year Treasury offers 3.10% or so. Timothy Taylor of the excellent Conversable Economist pointed out recently that the US Federal Reserve will likely face the zero bound early in the next recession, and will have to resort to QE. Depending on when the next recession is, the Fed may be back to the capital markets buying bonds before it has sold much of its existing $4.0 trillion stockpile of bonds and mortgage-backed securities,… Read More

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That many think the US Federal Reserve should reconsider its plans to raise interest rates and reduce the size of its balance sheet is not surprising. What is eyebrow-raising is that many mainstream, or “establishment” economists are also warning the Fed that it may be going too far in its preemptive strikes against inflation. For example, Joachim Fels, global economic adviser at Pimco (the world’s largest bond manager) said at a Reuters Global Investment 2019 Outlook Summit in mid-November that rate hikes risk pushing 2-year Treasury yields higher than those on longer-term bonds, which many investors regard as a totem… Read More

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Taking credit where no credit is due

Powell:  “I’m very happy about the state of the economy now,” he said in an interview with Dallas Fed President Robert Kaplan. “Our policy is part of the reason why our economy is in such a good place right now.” Beginning in ’06 with tight monetary policy, the Fed managed to crash the economy. Now it wants credit for an inexistent recovery? As the latest release of Retail Sales show, there is no economic boom despite tax cuts, the low unemployment rate and repeated emphasis on the economy being in a “good place”. As has been the case since 2008,… Read More

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11 years on, and the Great Recession and its aftermath are still a “mystery”

Recently, there have been several attempts at “making sense” of all that happened. For example, Bernanke has tried to answer the question of why the recession was so deep, while Jason Furman/Martin Sandbu try to make sense of the “slow recovery”. Brad DeLong is more encompassing asking, “Was the Great Recession more Damaging than the Great Depression?” What were the views from years ago? More than seven years ago, when the “recovery” from the “Great Recession” was about to complete two years, many were worried the recovery was “too slow”. For example, Mark Thoma argued, “It’s not the lack of confidence fairy that is… Read More

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Why?

More than 10 years after the fall, we remain perplexed by the failure to answer basic questions such as “why was the crash so deep” and “why we are still haunted by it”. Recently, Bernanke has tried to answer the first question, while Jason Furman/Martin Sandbu take a stab at the second. Now, Brad DeLong “goes for broke”, asking, “Was the Great Recession more Damaging than the Great Depression?” Your parents’ — more likely your grandparents’ — Great Depression opened with the then-biggest-ever stock market crash, continued with the largest-ever sustained decline in GDP, and ended with a near-decade of… Read More

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We don´t have a “high pressure” economy, but a “low pressure” one

Atlanta Fed Bostic writes “On Maximizing Employment, a Case for Caution”: When the actual unemployment rate declines substantially below the natural rate—highlighted as the red areas in the following chart—the economy has moved into a “high-pressure period.” For the purposes of this discussion, the important thing about high-pressure economies is that, virtually without exception, they are followed by a recession. Why? Well, as I described in a recent speech: “One view is that it is because monetary policy tends to take on a much more ‘muscular’ stance—some might say too muscular—at the end of these high-pressure periods to combat rising nominal… Read More

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