FOMC Watch

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…...

This content is for Free Trial and Subscriber members only.
Log In Register
Share

“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…...

This content is for Free Trial and Subscriber members only.
Log In Register
Share

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…...

This content is for Free Trial and Subscriber members only.
Log In Register
Share

John Williams suggests an alternative monetary policy framework

His argument: Potential output—the maximum amount an economy can produce over the long run—is an important indicator policymakers use to gauge a country’s current economic health and expectations for future growth. However, potential output can’t be observed directly, and estimating it is difficult, even with modern, sophisticated methods. Monetary policymakers are well advised to account for the perennial problem of uncertainty surrounding these estimates in devising and carrying out policy strategies. He suggests an alternative: In light of the reality that measuring potential output is very difficult despite the best efforts, it pays to avoid overreliance on these estimates when…...

This content is for Free Trial and Subscriber members only.
Log In Register
Share

Jerome Powell´s inheritance

First let´s look at Yellen´s tenure. This was the first time since 1951 that a Fed Chairperson that completed his first term was not appointed for a second stint. It was also the first time during the same period that a Fed Chair did not preside over a recession in his first term. For the first time, also, unemployment only decreased. Inflation remained low as it had for the past 25 years. One could conclude that Janet Yellen had the most successful first term as Fed Chair in the post war period…but didn´t get reappointed! Note, however, that Yellen´s tenure…...

This content is for Free Trial and Subscriber members only.
Log In Register
Share

The meaning of “Solid” is elastic

From the Statement: “Economic activity has been rising at a solid rate despite hurricane-related disruptions.” The chart shows annualized growth during this “expansion”. Average growth since 2015 is the same as average growth from 2010 to 2014, about 2.1%. Since 2014, what has changed is the volatility of growth, which has dropped by almost half. The only thing that has remained inelastically “solid” is the deepening of the economic contraction!...

This content is for Free Trial and Subscriber members only.
Log In Register
Share

Yellen´s “Sunday Sermon”: A broken record

On Sunday, October 15, Yellen, among other central bank chiefs, gave a talk to a group of international bankers. Her usual story regarding low inflation was present: Inflation readings over the past several months have been surprisingly soft, however, and the 12-month change in core PCE prices has fallen to 1.3 percent. The recent softness seems to have been exaggerated by what look like one-off reductions in some categories of prices, especially a large decline in quality-adjusted prices for wireless telephone services. My best guess is that these soft readings will not persist, and with the ongoing strengthening of labor…...

This content is for Free Trial and Subscriber members only.
Log In Register
Share

Why doesn´t the Fed look at its own measures of price pressure?

From most accounts, the Fed is at a loss to understand why inflation is low. Some say their model is broken. Others that changes like globalization have messed their understanding of the inflation process. A few years ago, the St Louis Fed developed an indicator to measure price pressure. According to them: Policymakers usually want to know—to the extent possible—the probability that inflation over the next four or eight quarters will exceed the inflation target. Or, if inflation is very low, they may also want to know the probability that inflation will fall below zero (deflation). Specifically, if Fed policymakers perceive…...

This content is for Free Trial and Subscriber members only.
Log In Register
Share

Questions for U.S. monetary policy Is U.S. economic growth poised for a rebound in the second half of 2017, as compared to the first half? Is the downside inflation surprise in the first half of 2017 likely to reverse in the second half of 2017? Will continued strong performance of U.S. labor markets put upward pressure on inflation? • The answer to all these questions: “Probably not.” And concludes: Recent data indicate that U.S. real GDP growth remains consistent with the low-growth regime of recent years. U.S. inflation has surprised to the downside in recent months, and the surprise is…...

This content is for Free Trial and Subscriber members only.
Log In Register
Share

Yellen is Stunned!

In her speech today, Janet shows she has no idea what drives inflation: Key among current uncertainties are the forces driving inflation, which has remained low in recent years despite substantial improvement in labor market conditions. As I will discuss, this low inflation likely reflects factors whose influence should fade over time. But as I will also discuss, many uncertainties attend this assessment, and downward pressures on inflation could prove to be unexpectedly persistent. My colleagues and I may have misjudged the strength of the labor market, the degree to which longer-run inflation expectations are consistent with our inflation objective,…...

This content is for Free Trial and Subscriber members only.
Log In Register
Share