November 2018

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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Worker Compensation Still a Drag On Fed’s Inflation Target

The conventional financial-media headlines said the third-quarter employment cost index, out on Halloween, indicated “Pay Jumped.” What the headlines did not say (but should have) was, “Employment costs remain a drag on the Federal Reserve’s putative 2% inflation target.” The employment cost index, a broad measure of workers costs prepared by the Department of Labor that includes pay and benefits, rose 2.8% year-over-year in the third quarter. Of course, that means productivity gains in excess of 1% annually reduce unit labor costs to under 2% annually. Indeed. A day after the Halloween release, the Department of Labor released its second-quarter… Read More

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Jason Furman/Martin Sandbu have the wrong premise

In The US´s lost decade, Martin Sandbu writes: I was recently presented with an intriguing thought experiment by Jason Furman, the chair of Barack Obama’s Council of Economic Advisers. He asked me: “Assume that on September 16, 2008, you were put in charge of US fiscal and monetary policy. You are given perfect foresight about the slowness of the recovery and the lack of an inflationary spiral. You are allowed to use the same tools (maybe plus a little) so nothing highly exotic, but you can use them sooner, keep them on for longer, and dial them differently. If you… Read More

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NGDP Outlook Update - November 2018

We got our first read on Q3 2018 NGDP last week, it came in at $20.659 trillion, right in line with our model’s number of $20.684 trillion, based simply on the model’s time series ‘momentum’ of the recent NGDP component and the market prices component. Recent NGDP movements are the best predictor of future NGPD movements, even more so than market signals; so often NGDP updates can move our forecast quite a bit, but not this time. Instead, the forecast has dropped due to…you guessed it…the huge drop in US equity prices, commodities, a bearish shift in the yield curve… Read More

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