2018

Price Level targeting would not have avoided disaster in 2008

Raphael Bostic, Atlanta Fed president, is arguing for a change in the monetary policy framework, from inflation targeting (IT) to price level targeting (PLT) See here, here.& here. What I want to show is that, although PLT differs from IT in that PLT has a “memory”, it suffers from the same weakness, i.e. it is sensitive to supply (for example, oil) shocks. In addition, I argue that an alternative monetary policy framework, NGDP level targeting, also has memory but does not suffer from the supply shock sensitivity of PLT. Ten years ago, the FOMC was “laser focused” on inflation. In… Read More

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Bad Monetary Policy: small effect on inflation, strong impact on real growth

Some love to “data mine” for inflation. David Rosenberg, for example, twitted: Shh…don’t tell the Fed that its beloved core PCE deflator is running at 2.3% SAAR over the past 6 months (hottest in 7 years) and that the 3-month trend has shot up 2.8% — we haven’t seen this since Nov 2007. Yet another in the long list of late-cycle indicators. The fact is that for the last quarter century inflation has been tame and contained, early or late cycle. The panel below illustrates the implications of a bad monetary policy, here taken to mean a lower than ideal… Read More

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Monetary Policy Potpourri

Monetary Policy Framework Raphael Bostic, president of the Atlanta Fed has a three part (so far) series on Thoughts on a Long-Run Monetary Policy Framework. His preferred framework is for the Fed to adopt price level targeting. Bostic writes: [f]ormer Fed chairman Alan Greenspan offered a well-known definition of what it means for a central bank to succeed on a charge to deliver price stability. Paraphrasing, Chairman Greenspan suggested that the goal of price stability is met when households and business ignore inflation when making key economic decisions that affect their financial futures. I agree with the Greenspan definition, and… Read More

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In contrast to the proverbial monkey, there are those that “see, hear & speak” inflation

From Goldman Sachs: “During most of the post-crisis recovery, inflation risks have been subdued. However, concerns with “overheating” and higher inflation are now being raised given a combination of strong global growth and diminishing economic slack, increasing labor market tightness, expansionary fiscal policy vs. only gradual normalization of monetary policy in the U.S., risks from trade protectionism / retaliation, and the potential for higher commodity spot prices as inventories continue to draw down,” writes Goldman Sachs strategist Michael Hinds. “There’s really no question – inflation is rising.” –  @inflation_guy His yardstick: The New York Fed “Underlying Inflation Gauge” (UIG) “Underlying… Read More

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The Week Ending Friday March 24th 2018 Instead of unexpectedly good earnings news to boost equities past recent record highs, we got two big changes from Trump that set alarm bells ringing around the world and did impact equities. It turns out the iron and steel tariffs were just a starter. The $60bn-worth of Chinese imports is the main course and clearly a huge concern hitting the share prices of many US equities early and mid-week. At the end of the week, the change in National Security Adviser to a well-known hawk made an escalation in conflict more likely –… Read More

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NGDP Outlook Update Q1 2018

As historically unremarkable as present economic conditions are, it’s still worth noting they were unexpected (at least by us, and many others). It was only a year ago that NGDP expectations were not far from 3.5%; today NGDP is expected to fly along just around 4.7% year-over-year for the next two quarters, closing at 4.25% for the year ending 2019Q1. We are now at a multiyear high in terms of a relatively simple, consistent methodology, forecasting NGDP, “t plus one year”. This forecast is mostly driven by recent NGDP changes, which is why it is not too inaccurate in a… Read More

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“Clueless in Washington” or, better no theory than bad theory

What has changed with the move from Yellen to Powell? From yesterday´s presser, less reliance on theory and models and more weight on the actual behavior of the economy. For example, Powell said that labor market getting tight when we do see more meaningful upward move in wages. According to the chart below, that´s “far off”. The blue line indicates wage growth when unemployment is “low” (below 5%). Implicitly, he dismisses Yellen´s preferred theory. To Powell, “The theory would be if you get below the sustainable rate of unemployment for a sustained period, you would see an acceleration of inflation.… Read More

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Industrial Production - An oil & auto tale

In February, industrial production had a banner month, rising far above expectations. What´s going on? The story of industrial production over the last few years is quite straightforward. For the first five years following the end of the great recession, industrial production was rising. In late 2014, growth fizzled and industrial production began to contract. In late 2016, we observe what came to be known as the “Trump bounce”. That proved to be temporary, and by mid-2017, industrial production was again trending down. Then the late summer of 2017 witnessed the big storms (hurricanes). Industrial production stepped-up to satisfy replacement… Read More

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Markets are robust, FOMC unlikely to spoil party

The Week Ending Friday March 16th 2018 A quiet week of consolidation in most markets. Equities drifted off but have done well to move back to the February highs. More growth would need unexpectedly good earnings news – and the market is already pricing in good news following strong 2017Q4 and strong guidance for 2018. The “whisper season” is now on in earnest as companies steer analysts to numbers for 2018Q1 that they think they can then beat, but even here the trend is for higher whisper estimates as opposed to the usual lower figures. US equities are doing well.… Read More

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Risk of overheating? Tailwinds? In fact, quite the contrary

The story told by the consumer doesn´t leave much doubt that the economy is on a “cooling streak”. The chart shows that retail sales (just as several other statistics) captured the burst of activity triggered by the cleanup and recovery from the severe storms along the Gulf Coast in late summer 2017, with growth in sales strongly positive in September-November. That, however, has long gone, with a string of three negative rates in December/17-February/18. Today´s release gave rise to significantly negative market reactions, with stocks, the dollar and long-term yields falling. Overall consumer spending, available to January, also tells a… Read More

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