FOMC Watch

Low IQ central bankers

A good example of one is John Williams: “My own view is that it has been not that baffling,” Mr. Williams said, referring to low inflation. He noted that prices in some sectors such as health care and cellular services have been hit by downward movements, and that prices typically reflecting developments in the economy have been rising. “With a strong economy, history teaches us that inflation tends to move up,” he said. Mr Williams thinks inflation is a price phenomenon. Relative prices are always moving. Some prices fall while others increase. That´s the signaling nature of prices. Inflation, however,…...

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The FOMC Meeting didn´t bring out anything new. There was, as customary, some “dot shifting”. For example, in June 4 participants thought two more rate hikes this year would be appropriate. Three have “jumped ship. The 4 doves, those that don´t think an additional rate hike this year is necessary, remained the same. The interest rate outlook for next year remained largely unchanged, with three hikes envisioned. However, the Fed slowed the pace of projected monetary tightening from there. The “forever” (i.e. long-term) rate is now seen as remaining below 3%. In the post meeting presser, two statements by Yellen…...

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A potpourri of recent statements

Bullard There seems to be little risk—at least according to these estimates—that inflation would pick up appreciably from its current level solely because unemployment is low. The results shown here call into question the idea that unemployment outcomes are a major factor in driving inflation outcomes in the U.S. economy. Inflation expectations, for instance, are probably a more important determinant of inflation outcomes than unemployment. For monetary policy purposes, we should not base our notions of what will happen with inflation solely on ideas related to low unemployment. While we certainly want to keep an eye on inflation readings, there seems to…...

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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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