2018

Powell was different, but humdrum

Coming into his second post FOMC presser, Powell was more relaxed(?). The Bloomberg headline by Jeanna Smialeck seems an apt description: Powell Styles Himself a Fed Chairman for the People: Alan Greenspan famously said he had mastered the art of mumbling “with great incoherence” as Federal Reserve chair. Jerome Powell is attempting the opposite approach. “Because monetary policy affects everyone, I want to start with a plain English summary of how the economy is doing, what my colleagues and I at the Federal Reserve are trying to do and why.” He continued: As Chairman, I hope to foster a public… Read More

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CPI Report: No surprises

It came exactly as expected, with core CPI clocking 2.2%, so no significant asset price moves. The chart below compares core CPI and core PCE. These inflation gauges have been well behaved over the past several years. Note there is a 40 basis point gap between the CPI and PCE, implying that the May 2018 core PCE will remain below the 2% target. In fact, two or three years ago, inflation, by any gauge, was more ‘calamitous’ than now. Why, then, is the Fed so concerned about ‘overheating’? Maybe because it feels below 4% unemployment is harmful!  

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The Fed´s ‘model’ is screwed up

In Powell’s Fed Could Clear Up a Few Mysteries Puzzling Investors, we read: The Fed says unemployment is already running below the level that can be sustained in the longer run, but wages are crawling higher rather than taking off. What’s more, job growth hasn’t slowed down as much as you might expect in an economy with a big worker shortage. Fortunately, inflation is not a wage phenomenon. On the contrary, it is inflation that drives up wages. The late 1960s makes that clear. Note that wage growth only picks up after inflation has almost tripled! Comparing the late 1990s… Read More

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When ‘good’ is ‘terrible’

The headline: The Fed’s Biggest Dilemma: Is the Booming Job Market a Problem? Snipets: No question looms larger for Federal Reserve Chairman Jerome Powell than this: How low can the U.S. unemployment rate safely go? Only twice in the past half-century has unemployment fallen to its current rate of 3.8%—for a few years in the late 1960s and for one month in 2000. The ’60s episode spurred years of soaring inflation that would take a decade for policy makers to corral. The latter coincided with a technology bubble that, when it burst, caused the 2001 recession. It seems low unemployment… Read More

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Modest optimism returns but growth may not

Week Ending Friday June 8, 2018 Markets recovered some of their poise last weeks. Bond yields fluctuated but ended the week not much different from where they started and equities rallied reaching levels last seen in April. The back-on-again talks with North Korea beat the G7 discord, while expectations for the trade war merely fluctuated. Growth seems to be disappearing in US a bit, elsewhere a lot While NGDP growth in the US has appeared to accelerate into 2018Q1 with a high of 4.7% YoY, the best since 2015Q1, it isn’t quite that good. There were two very strong quarters… Read More

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“Construction in the residential market remained solid, though the shortage of labor and intense price pressures for building materials continued to act as headwinds.” The above paragraph is from the May 30 Beige Book, the Fed’s periodic wrap up of economic conditions in its 12 districts. Can you guess which of the 12 districts the Fed is describing?  Dallas, perhaps? No, the above is the Fed’s most-recent synopsis of housing markets in the Fed’s San Francisco 12th District, which is the West Coast. What is odd about the Fed’s resolute myopia is that there is a broad, bright-red common thread… Read More

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Keynes; “The difficulty lies, not in the new ideas, but in escaping from the old ones”

An old idea never relinquished is the one that sees inflation as a cost phenomenon, or the result of “cost-push.” A recent op-ed by Peter Hooper, managing director and chief-economist of Deutsche Bank Securities, and more significantly a 26-year veteran of the Federal Reserve Board in Washington, DC, provides a good illustration. According to him, “the Trump administration doesn’t seem concerned about this. It has taken at least six actions that have either actually or potentially boosted inflationary pressures. As a result, it has risked making our next economic downturn more severe.” The first is the “classic” Phillips-Curve reasoning: Historical… Read More

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In a depression, recession calls are even harder to make

The flattening of the yield curve has generated heated discussions about a coming recession. Some like Bullard, for example, caution the FOMC´s appetite to raise rates. Others like Deutsche Bank, say yield curve flattening belies strong growth outlook for U.S: “The risks of overheating and inflation are much higher than the risks of a recession. And the irony of this discussion is that the low level of long rates, and hence, the flatness of the curve, is increasing the probability of overheating even further. Lower long-dated yields keep financial conditions loose, heightening the risk of an upsurge in growth, not… Read More

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Houston, we have a (nominal) problem

Two instances of 3.8% unemployment and the corresponding wage, labor force participation and inflation. It doesn´t seem likely that the 3.8% unemployment today indicates anything close to full employment. The chart is illustrative. One implication is that Fed decisions shouldn´t be informed by the unemployment rate (relative to estimates of “natural”). For example, statements like the following: “Indeed, in the Fed’s forecast such tighter policy is necessary to edge up the unemployment rate and return the economy to a sustainable, non-inflationary path.” Are inexcusable, having no correspondence in reality. The Fed has direct influence over the nominal economy. In the… Read More

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Week Ending Friday June 1, 2018 Market movements last week implied modestly lower NGDP growth in the coming year. Our market-driven forecast, which we use to cut through the noise and detect the meaning of aggregate market moves, fell from 4.0% to 3.9%, Thursday-to-Thursday. This small move lower reflected lower copper and oil prices, a stronger dollar, lower stocks, lower 5-year TIPS spreads and a more gently sloping yield curve. The 5-year yield fell from 2.82% to 2.68%, and the two-year from 2.5% to 2.4%, while shorted dated bonds were little changed. There were potentially important data releases last week,… Read More

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