FOMC Watch

Taking credit where no credit is due

Powell:  “I’m very happy about the state of the economy now,” he said in an interview with Dallas Fed President Robert Kaplan. “Our policy is part of the reason why our economy is in such a good place right now.” Beginning in ’06 with tight monetary policy, the Fed managed to crash the economy. Now it wants credit for an inexistent recovery? As the latest release of Retail Sales show, there is no economic boom despite tax cuts, the low unemployment rate and repeated emphasis on the economy being in a “good place”. As has been the case since 2008,… Read More

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We don´t have a “high pressure” economy, but a “low pressure” one

Atlanta Fed Bostic writes “On Maximizing Employment, a Case for Caution”: When the actual unemployment rate declines substantially below the natural rate—highlighted as the red areas in the following chart—the economy has moved into a “high-pressure period.” For the purposes of this discussion, the important thing about high-pressure economies is that, virtually without exception, they are followed by a recession. Why? Well, as I described in a recent speech: “One view is that it is because monetary policy tends to take on a much more ‘muscular’ stance—some might say too muscular—at the end of these high-pressure periods to combat rising nominal… Read More

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The FOMC deceives itself

With all the talk about the economy being “in a good place” and being “strong”. A couple of examples. From Jerome Powell: Today I will focus on the Federal Reserve’s ongoing efforts to promote maximum employment and stable prices. I am pleased to say that, by these measures, the economy looks very good. I am glad to be able to stand here and say that the economy is strong, unemployment is near 50-year lows, and inflation is roughly at our 2 percent objective. Atlanta Fed´s Bostic “ups the ante” writing: The economy is in a good place. So good, in… Read More

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The Fed´s monetary policy has become dysfunctional

Tim Duy is a well known “Fed Watcher”. As such what he writes does not necessarily reflect his views but what he sees as the Fed´s view. In “Fed intent on raising rates even if the economy sours”, we read: A combination of weak labor force growth, solid employment growth, a lower unemployment rate, and firmer wage gains will tend to support the Fed’s view that the labor market needs to cool substantially to prevent inflationary pressures from building. Regardless of the estimate of the neutral interest rate, central bankers probably won’t think policy is restrictive until they see a… Read More

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Late into the first quarter of the 21st century, the Fed is still in the Dark Age!

That was my take from Jay Powell´s NABE speech, where he placed the Phillips Curve at the center of the FOMCs decision-making process. Below I reproduce a few paragraphs of the speech, which will put my discussion in perspective: …For example, the medians of the most recent projections from FOMC participants and the Survey of Professional Forecasters, as well as the most recent Congressional Budget Office (CBO) forecast, all have the unemployment rate remaining below 4 percent through the end of 2020, with inflation staying very near 2 percent over the same period. From the standpoint of our dual mandate,… Read More

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The “Term Premium” Meme

This is Ben Bernanke in March 2006 on Reflections on the Yield Curve and Monetary Policy: However, if the behavior of long-term yields reflects current or prospective economic conditions, the implications for policy may be quite different–indeed, quite the opposite. The simplest case in point is when low or falling long-term yields reflect investor expectations of future economic weakness. Suppose, for example, that investors expect economic activity to slow at some point in the future. If investors expect that weakness to require policy easing in the medium term, they will mark down their projected path of future spot interest rates,… Read More

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“Get ready for here I come”

(Temptations) In the discussion, “Is the world ready for the next downturn”? Thomas Mayer, former Deutsch Bank Chief-Economist, points out: As long as Keynesian economics is the shared mental model of most economists and almost all central bankers and politicians, we proceed from one financial crisis to another. The list is already fairly long: the stock market crash of 1987, the savings and loan crisis of the early 1990s, the bond market crash of 1994, the emerging market crisis of 1998, the dot.com crash of 2000–2003, and the financial crisis of 2007–2008. The list will only end when economists and… Read More

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Ten years later, they still have the wrong perspective on the 2008 crisis

BEN S. BERNANKE, TIMOTHY F. GEITHNER and HENRY M. PAULSON Jr, remember the 10-yr anniversary of Lehman: Although we and other financial regulators did not foresee the crisis, we moved aggressively to stop it. Acting in its traditional role as lender of last resort, the Federal Reserve provided massive quantities of short-term loans to financial institutions facing runs, while cutting interest rates nearly to zero. The Treasury Department stopped a run on money market funds by providing a backstop for investors. The Treasury also managed the takeover of the mortgage giants Fannie Mae and Freddie Mac, and worked with the… Read More

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Jackson Hole 2018 – A time-travel

The theme was market power & monetary policy. That was in the minds of monetary policymakers more than 40 years ago, albeit not as a “force” that restrains wages and prices but as a “force” that enhances them. Today: — Two of the most important economic facts of the last few decades are that more industries are being dominated by a handful of extraordinarily successful companies and that wages, inflation and growth have remained stubbornly low. Many of the world’s most powerful economic policymakers are now taking seriously the possibility that the first of those facts is a cause of… Read More

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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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