2018

Doing quite well?

From MarketWatch: The U.S. economy is doing quite well right now, but it could falter over the next couple of years as the stimulus fades away, said Paul Ashworth, chief U.S. economist for Capital Economics, and the winner of the Forecaster of the Month award for March. Retail sales data were released today. “The story is not fine”. The panel shows that the August-September 2017 storms gave a boost to sales, mostly for replacement purposes.  That boost has petered out, despite fiscal stimulus. When you look at discretionary spending – on such things as Appliances & Electronics and Furniture –… Read More

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As you were, men

The Week Ending Friday April 13 2018 So, it turns out the Friday mini-crash in US equities was a bit of a false alarm. Sure the market is right to be worried about Powell and his pragmatism, but at least war with Russia seems off the agenda and the trade war seems headed for negotiations. Trump’s early warning to the Syrians to move their assets into Russian bases had the effect of removing targets for the Western allies to hit. So reducing the risk of war. A refocus on equity earnings is in prospect and that should bring good news… Read More

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Looking at inflation as a “price phenomenon”

That´s what many analysts do, going into the details of price moves from pickles to trucks. The Fed many times falls into the same trap, but correctly restrains its “hiking impetus”: “All participants expected inflation on a 12-month basis to move up in coming months. This expectation partly reflected the arithmetic effect of the soft readings on inflation in early 2017 dropping out of the calculation; it was noted that the increase in the inflation rate arising from this source was widely expected and, by itself, would not justify a change in the projected path for the federal funds rate.”… Read More

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The Minutes quote that says it all

“Some participants suggested that, at some point, it might become necessary to revise statement language to acknowledge that, in pursuit of the Committee’s statutory mandate and consistent with the median of participants’ policy rate projections in the SEP, monetary policy eventually would likely gradually move from an accommodative stance to being a neutral or restraining factor for economic activity.” As if for the past eight years at least, monetary policy had not been a restraining factor! The charts illustrate it vividly. [Note: FG= “Forward Guidance”, introduced by the Fed at the August 2003 Meeting]

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The sure-fire way of stabilizing the real economy or, “all roads lead to Rome”

At Vox, Walentin and Westermark write, “Stabilising the real economy increases average output”: The intro: The Great Recession has generated a debate regarding the potential effects on the long-run levels of output and unemployment of stabilising the real economy (e.g. Summers 2015). This issue takes on additional importance as the current economic situation in some countries, including the US, imply that there is a monetary policy trade-off between stabilising inflation and the real economy. In particular, the unemployment level is low at the same time as inflation is low. More generally, the question at hand is whether policymakers, in particular… Read More

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The Week Ending Friday April 6th 2018 Jerome Powell does not impress us so far. His autopilot rate rise in March seemed unnecessary, lacking any real rationale apart from the intellectually bankrupt “normalization” theme. His speech on Friday moved markets little at first, but selling momentum in equities increased as trade war worries built a lethal cocktail of monetary tightening combined with falling growth expectations. Other market indicators were relatively quiet. Our new NGDP Forecast for 2019Q2 has not started well, having fallen back on the recent market wobbles. Is Powell on opioids? We gasped when he attributed the low Labor Force… Read More

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The Employment Report: Strong, Solid, or just Dull?

The report was weaker than expected. However, nothing in this report will cause the Fed any concern about their prevailing view of the economic picture in the US. Lower than expected jobs numbers were met by expected hourly earnings growth. What matters is that the predominant view at the Fed [although misguided] is that the economy is at or below the level of employment that keeps inflation in check. The charts depict what has been going on for the past two years, coinciding with the period the Fed became more obstinate about tightening. The top chart shows that during the… Read More

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Does quantitative easing (QE) work? It is tempting to draw analogies along the lines of, “If a nation has to ask if it is winning a foreign war 10 years after initiating hostilities….” Stephen Williamson, economist formerly of the St. Louis Fed, argues that quantitative easing is a dud. Regional Federal Reserve banks on three occasions (at least) have issued studies that QE is not inflationary, and but only faintly stimulative. Certainly, present-day Japan is not a comforting example. In recent years, the Bank of Japan has bought back 45% of outstanding Japanese government bonds (that is saying something, btw),… Read More

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The Week Ending Friday March 30 2018 Last week saw notable volatility in equities and a revised NGDP release. Other data included Personal Income and the PCE price index, some regional Fed indices and pending home sales. Friday-to-Friday, the S&P 500 rose 2%, with a swing of -2.3% intraweek, bottoming on Wednesday the 28th. The Crypto markets have taken an interesting turn. We were intrigued by Bitcoin due to the high price achieved in early 2018. That price has since fallen considerably, from $16k to $7k. Bitcoin has risen in relative value against the other blockchain-based tokens with the Ethereum… Read More

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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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