FOMC Watch

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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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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