FOMC Watch

In his intro to the Congressional Hearing today, Powell said: “Monetary policy affects everyone and should be a mystery to no one.” Which brought to my mind Greenspan´s tirade shortly after taking the Fed´s helm: “Since I’ve become a central banker, I’ve learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said.” -Alan Greenspan, 1987 The undeniable fact is that to the great majority of people, monetary policy will always be a mystery. It´s therefore an impossible dream to think it “should be a mystery to no one”. Greenspan recognized… Read More

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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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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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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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“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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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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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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January FOMC Meeting – Extended discussion of inflation forecasting

Following the staff presentations, participants discussed how the inflation frameworks reviewed in the briefings informed their views on inflation and monetary policy. Almost all participants who commented agreed that a Phillips curve-type of inflation framework remained useful as one of their tools for understanding inflation dynamics and informing their decisions on monetary policy. Unfortunately, they overlook the fact that Phillips Curves do not depict a structural relation. The Phillips Curve is not invariant to monetary policy behavior. In short, it is the Fed that creates the correlations between inflation & unemployment. The Lesson: Phillips Curve analysis is not a reliable… Read More

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“Peace with honor” regarding inflation?

From reports: Federal Reserve policy makers are openly voicing their willingness to accept above-target inflation even as price pressures are beginning to build. “Let me be clear: A small and transitory overshoot of 2 percent inflation would not be a problem,” William Dudley, president of the Federal Reserve Bank of New York, said in a Jan. 11 speech. “Were it to occur, it would demonstrate that our inflation target is symmetric, and it would help keep inflation expectations well-anchored around our longer-run objective.” If that sounds ridiculous it´s because it is! “Even as price pressures are beginning to build”. Inflation may… Read More

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Marvin Goodfriend has been nominated to the Federal Reserve Board, waiting for Senate confirmation. He comes to the Fed at a critical moment. Critical, because the Fed is in the process of rethinking its monetary policy framework. As Ben Bernanke said in a recent gathering at the Brookings Institution: Former Federal Reserve Chairman Ben Bernanke predicted that the central bank’s new leadership will study alternate regimes for monetary policy over the next year to 18 months. “There will be some pretty serious discussions” on policy frameworks at the Fed under the chairmanship of Jerome Powell, Bernanke said Monday. He said Powell… Read More

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