FOMC Watch

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…...

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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…...

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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…...

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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,…...

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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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