2018

The Fed makes-up reasons to justify their preferred actions

In her recent speech, Lael Brainard ends with the punchline: In many respects, the macro environment today is the mirror image of the environment we confronted a couple of years ago. In the earlier period, strong headwinds sapped the momentum of the recovery and weighed down the path of policy. Today, with headwinds shifting to tailwinds, the reverse could hold true. The charts indicate that there have been several instances of “mirror images” over the last 8 years. The latest  “cycle” is characterized by the strongest headwind and the weakest tailwind. That becomes more evident when you see that real… Read More

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Shifting winds

Lael Brainard gave a speech, Navigating Monetary Policy as Headwinds Shift to Tailwinds Since the speech is mostly boilerplate with a catchy title, I´ll jump straight to the conclusion, In many respects, the macro environment today is the mirror image of the environment we confronted a couple of years ago. In the earlier period, strong headwinds sapped the momentum of the recovery and weighed down the path of policy. Today, with headwinds shifting to tailwinds, the reverse could hold true. She doesn´t mention that the “winds have shifted” several times in the past eight years. In fact, the latest shift… Read More

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The “impossibility” of inflation

For the past 25 years, inflation (PCE-Core) has remained low and stable. Nevertheless, many are worried that inflation is about to “take-off”. In a recent piece, Greg Ip writes, “Why an unpleasant inflation surprise could be coming”: Inflation is going to head up this year — on that there isn’t much debate. … If inflation turns up, economists have long assumed it would do so slowly, giving the Fed plenty of time to respond. But Michael Feroli of J.P. Morgan notes this assumption is built on models in which the world behaves in a predictable, linear way. In fact, he… Read More

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Week Ending Friday March 2 This was a relatively rough week for markets. The S&P 500 fell 1.8%, Friday-to-Friday, most of this seemingly linked to statements by new Fed Chairman Jerome Powell, as well as a tariff announced by the Trump administration on steel and aluminum. Powell’s statements were less polished than Bernanke´s or Yellen’s, though equally platitude-laden and low-information. Powell says inflation will return to 2% in some unspecified but near timeframe, with no indication that a period of offsetting 2%+ inflation would be allowed for symmetry. In other words, the 2% PCE inflation ceiling remains in place. Powell… Read More

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Is the Truism, “Money Is Neutral in the Long Run,” Really True?

Surely, merely running a printing press disgorging fiat money cannot truly increase economic output.  It is a truism. But what about historic examples of central banks policies and real economic output? Milton Friedman blamed the Great Depression on tight money. More recently, the 2008 Great Recession, which by some measures still results in crimped output, was caused by tight money.  Japan’s 20-year deflationary slog has been caused by tight money. So, by historical example, many macroeconomists seem to agree bad monetary policy can crimp real output for decades at a time and can persist indefinitely, unless corrected, as may be… Read More

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“Inflation (not the Russians) is coming”

There isn´t much doubt or debate about it, and the Fed is poorly prepared! Greg Ip: Inflation is going to head up this year — on that there isn’t much debate. Carmen & Vincent Reinhart: Major central banks’ fixation on inflation betrays a guilty conscience for serially falling short of their targets. It also raises the risk that in fighting the last war, they will be poorly prepared for the next – the battle against too-high inflation. In his Testimony, Powell said he wants to see inflation go back to 2%, but does not want to risk “overheating” the economy.… Read More

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There´s the “fiction” (or farce) & the fact

Both Yellen and Powell kicked-off their Congressional Testimony with the same “upbeat” views: Yellen´s first 2/11/14 The economic recovery gained greater traction in the second half of last year. Real gross domestic product (GDP) is currently estimated to have risen at an average annual rate of more than 3-1/2 percent in the third and fourth quarters, up from a 1-3/4 percent pace in the first half… Powell´s first 2/27/18 Inflation-adjusted gross domestic product rose at an annual rate of about 3 percent in the second half of 2017, 1 percentage point faster than its pace in the first half of… Read More

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Bank of England barking mad

The BBC reported earlier this month about the results of the Monetary Policy Committee (MPC): The Bank of England has indicated that the pace of interest rate increases could accelerate if the economy remains on its current track. Bank policymakers voted unanimously to keep interest rates on hold at 0.5% at their latest meeting. However, they said rates would need to rise “earlier” and by a “somewhat greater extent” than they thought at their last review in November. Economists think the next rate rise could come as soon as May. The value of the pound jumped by about 1% against both the… Read More

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The “Taper Tantrum” revisited

In the recent Booth School of Business conference in New York, a handful of authors, from academia and the markets, conclude: “Our procedure attributes most of the bond market selloff during the 2013 ‘taper tantrum’ to better economic news rather than to changing expectations for the end of balance sheet expansion,” the authors wrote. Independently, David Andolfatto in a blog post reaches a similar conclusion: Consumption growth turned positive in 2013.4, and continued to climb well into 2015. So while the tantrum may have contributed to the spike up in yields, the reason they stayed higher is because of an… Read More

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The Week Ending Friday February 23rd 2018 A very quiet week in most markets as the futures driven US holiday weakness was replaced by much better markets later in the week – reflected by our NGDP Forecast. While equities and bonds were flat it was against the background of a USD recovering strongly up 2% on the week and at the same time 5yr Breakeven Inflation consolidating the prior week surge finishing back above 2% for the first time in four years. Signs of change in Fed thinking? The Minutes of the January FOMC meeting appeared early in the week… Read More

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