FOMC Watch

The missing “mechanism”

Lael Brainard gave a speech Understanding the Disconnect between Employment and Inflation with a Low Neutral Rate, in which she tries to build the case for less tightening by the Fed. Some of her arguments: …Despite a similar degree of resource utilization, core inflation averaged 2.2 percent from 2004 to 2007, notably higher than the comparable three-year average inflation rate today of 1.5 percent. Why is inflation so much lower now than it was previously? The fact that the period from 2004 to 2007 had inflation around target with similar unemployment rates casts some doubt on the likelihood that resource…...

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Yellen’s future at the Fed

The media conclusion, following remarks Fed chair Janet Yellen gave at the yearly Jackson Hole financial elite meet up, was that she does not expect re-nomination. Yellen’s speech defended banking regulations put in place following the Great Recession, gainsaying the current administration which seeks to relax the costly stress testing and capital evaluation large US banks must undertake. The chart below (from politics betting site PredictIt.com) shows how Yellen’s prospects for re-nomination have fallen. Yellen’s speech on Friday pushed her contract down from 31% to 23%. It’s a dubious business for mere mortals to try and interpolate the dynamics behind…...

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Low inflation in the face of low unemployment (low resource slack) and easing of financial conditions is fostering disagreement at the FOMC. FOMC Minutes: Participants commented on a number of factors that would influence their ongoing assessments of the appropriate path for the federal funds rate. Most saw the outlook for economic activity and the labor market as little changed from their earlier projections and continued to anticipate that inflation would stabilize around the Committee’s 2 percent objective over the medium term. However, some participants expressed concern about the recent decline in inflation, which had occurred even as resource utilization…...

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Fed Statement: “No burger between the buns”

The “burger” was taken out at the March 17 FOMC meeting. Since then, it appears the “transmission mechanism” has broken. As Tim Duy, a well-known Fed watcher puts it: That said, the Fed will balance the inflation data against the broader economic backdrop of ongoing job growth and easier financial conditions. If the latter two trends continue, policy makers will be hard-pressed to rein in existing rate hike plans even if inflation continues to fall short of their forecasts. The traditionalists at the Fed, including Yellen, retain their fundamental Phillips curve framework. They think it is only a matter of…...

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And the markets reacted accordingly. Stocks up, dollar and long-term yields down. Dudley may be unhappy that financial conditions were loosened… To Yellen, inflation should rebound (as they have been saying for the past several years), but now recognizes that if softness persists, the Fed will act accordingly… “It’s premature to reach the judgment that we’re not on the path to 2% inflation over the next couple of years,” Ms. Yellen said Wednesday, during a hearing of the House Financial Services Committee. She repeated her view that an increasingly tight labor market would put upward pressure on wages and prices,…...

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Yellen´s overriding goal: “Normalize Monetary Policy”

But she may be frustrated. The most notable thing in the FOMC Minutes was the increasing divergence on inflation among participants. several participants expressed concern that progress toward the Committee’s 2 percent longer-run inflation objective might have slowed and that the recent softness in inflation might persist.  There is still some resistance, however, from the die-hard Phillips Curve faithful: Participants continued to expect that, as the effects of transitory factors waned and labor market conditions strengthened further, inflation would stabilize around the Committee’s 2 percent objective over the medium term.  Bottom Line: If Yellen persists in her “normalization effort”, she…...

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A good example from today´s speech by Philly Fed president Patrick Harker: Growth for 2017 so far is more or less what we expected. The first quarter was relatively weak, which has been the case for first quarters over the past several years. That’s what we’ve come to expect at this point, so it’s not cause for alarm. This year’s 1.2 percent Q1 growth was influenced by factors I believe are transient, like weather, seasonality, and low inventory investment. I expect second quarter growth to rebound and overall GDP growth for 2017 to average about 2.3 percent. Inflation has been…...

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In a speech today, New York Fed president Dudley, following Yellen´s press conference last Wednesday suggested that current levels of unemployment and inflation were a “pretty good place to be”! He also felt that the US economy was “close to full employment” and, despite inflation being a “little lower than the Fed would like”, he “expected wages to pick up as the labor market continues to tighten”. More importantly, Dudley “insisted that halting the tightening cycle would imperil the economy”. More likely, in our view, is that the June FOMC decision will mark the moment Yellen lost her “bet”. The…...

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The Fed´s overriding commitment: “Normalization”

Narayana Kocherlakota put it well yesterday: The U.S. Federal Reserve’s two main goals are to promote maximum employment and keep inflation close to 2 percent. But it also acts as if it has another, unspoken mandate: Don’t do anything too radical in pursuit of those goals. This allegiance to what’s considered “normal” harms a lot of people, black Americans in particular. Consider what happened in November 2010, when the economy was just starting to recover from a deep recession. Many Fed officials expected the unemployment rate to remain above 7 percent, and inflation below 1.5 percent, for the next few…...

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Minutes from FOMC Meetings are a fantasy!

From Participants’ Views on Current Conditions and the Economic Outlook: Although the incoming data showed that aggregate spending in the first quarter had been weaker than participants had expected, they viewed the slowing as likely to be transitory. They continued to expect that, with further gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace, labor market conditions would strengthen somewhat further, and inflation would stabilize around 2 percent over the medium term. In short, their plans for additional rate increases are unchanged. What they really want is to clamp down the economy. Let´s see what´s…...

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