2018

Now it´s used car prices and plane fares that “frustrate” the Fed

According to Bloomberg: U.S. consumer prices rose by less than forecast in April as costs for automobiles and airfares declined, reducing chances that inflation will run significantly above the Federal Reserve’s target in coming months. The “analytical” example comes from above; after all, didn´t the Fed just recently put the “blame” for low inflation on cellphone connections and drug prices? Until the Fed (and pundits) start analyzing inflation from a monetary (not interest rate), instead of from an unemployment or price perspective, not much will be accomplished. The idea that the stance of monetary policy is indicated by the level… Read More

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Echoes from the distant past show nothing has been learned

The discussion today: The unemployment rate dropped to its lowest level in nearly 18 years in April, feeding a debate that has long puzzled economists: How low can joblessness fall before a boon for the economy turns into a burden? Flash back more than twenty years. In 2001, Alan Blinder and Janet Yellen published “The fabulous decade – Macroeconomic lessons from the 1990s”. In chapter 6 “The Fed forbears and the Phillips Curve cooperates”, we read: The state of the U.S. economy looked superb at the start of 1996, and it just kept getting better over the ensuing years. The… Read More

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Australia, like the West Coast and some other regions of the US, or Canada and Great Britain, faces an explosion in house prices. The Reserve Bank of Australia recently issued a study concluding that in 2016 a whopping of A$488,944 of a typical A$1.16 million house price in Sydney was due to tight property zoning.  The RBA also says the zoning costs have been worsening. As bad as that is, I suspect the RBA actually understates matters, as they seem accept on face surging Sydney land values. But with an abundant supply of free-market housing, how valuable would Sydney land… Read More

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The Q1 unit labor cost figures, released last week, again are revealed as a drag on the US Federal Reserve putative 2% inflation target. The Q1 unit labor costs reading for the U.S is up 1.1% y/y and also up 0.8% from Q2…of 2016, reports the BLS via FRED. Yes, you read that right. Unit labor costs are close to flat-lining.  If the Fed wants to hit its 2% target, and if it wants wages to help it get there, it will have to find way to get wage growth up. Might one suggest stronger aggregate demand? “Labor Shortages” Back… Read More

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Fed keeps its “asymmetry of bias” stance intact – more´s the shame

The Week Ending Friday May 4th 2018 Last week we speculated about a potential negative surprise from a combination of FOMC meeting and data releases. While there were no dramatic moves in markets on any particular day or news release, the newswires were full of an apparent Emerging Markets crisis. Well, on closer examination what they were referring to was EM currency weakness. On a little more examination, many countries, both EM and Developed Markets, show currency weakness versus the USD. When so many countries are seeing “weak” performance of their currencies against the USD, it really means that the… Read More

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Employment Report: Still waiting for “Godot”

That is, the rise in wages, to the frustration of the Fed, never comes. In fact, there appears to be glaring “inconsistencies”, as the table indicates for wage growth, unemployment and core PCE inflation at selected moments: Wage Unemploym PCE Core Dec 00  4.3%         3.9%             1.8% Oct 09  2.7%          10%              1.3% Apr 18  2.6%          3.9%             1.9% It should also be noted that the drop in unemployment to 3.9% was wholly due to the 236 thousand fall in the labor force. By one measure of labor market tightness – the unemployed plus those not in the labor force but want a… Read More

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The inflation “excitement”

With headline PCE ticking at 2% and the core version, free from the “wireless base effects”, clocking 1.9%, it was expected that the FOMC Statement would reflect those advances. Quite the opposite happened, with the Statement “playing them down”: Inflation on a 12-month basis is expected to run near the Committee’s symmetric 2 percent objective over the medium term. The chart shows that for the past 63 months, headline PCE reached 2% (or above) on only three occasions. All are associated with a rise/spike in the price of oil. The next chart indicates that headline PCE inflation is an “oil… Read More

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While some thought that Markets Are Underestimating the Fed: The Federal Reserve will release its latest statement on monetary policy today, and although no change is anticipated, it’s becoming clearer that interest rates are too low and the risk of an acceleration in the pace of rate increases is much higher than currently perceived by investors. From parsing the Statement, it seems, however, that what the Fed wanted to convey to the markets is that it is not concerned about inflation at 2%, in the sense that that would change the pace of “rate normalization”. Information received since the Federal… Read More

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Inflation & Consumer Spending are bouncing back!

Some even think “stagflation”: Rising prices and collapsing confidence could portend that both inflation and slowing growth are looming, a sure recipe for stagflation. For the past quarter century, however, inflation dynamics has been tame, and tamer still post crisis! To others, Consumer Spending Bounced Back in March. However, another headline from the same source says Growth Cooled in First Quarter as Consumers Reined In Spending. Consumer spending has done nothing, let alone “bounce”. Compare and contrast consumer spending growth pre and post crisis! The “doomsday march” continues unabated!

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FOMC Funk

Long-term rates recently crawled up. On rising long-term rates, there are two theories. In the first, they signal an improved economic outlook, which leads investors to anticipate a swifter hike in rates. In the second, they are rising because of a change in investor expectations of a swifter rise in rates, independent of economic conditions. A swifter rise in rates is expected. According to recent views of FOMC members: Chairman Jerome Powell April 6, Chicago “As long as the economy continues broadly on its current path, further gradual increases in the federal-funds rate will best promote these goals.” Governor Lael Brainard April… Read More

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