FOMC Watch

“Clueless in Washington” or, better no theory than bad theory

What has changed with the move from Yellen to Powell? From yesterday´s presser, less reliance on theory and models and more weight on the actual behavior of the economy. For example, Powell said that labor market getting tight when we do see more meaningful upward move in wages. According to the chart below, that´s “far off”. The blue line indicates wage growth when unemployment is “low” (below 5%). Implicitly, he dismisses Yellen´s preferred theory. To Powell, “The theory would be if you get below the sustainable rate of unemployment for a sustained period, you would see an acceleration of inflation.… Read More

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Shifting winds

Lael Brainard gave a speech, Navigating Monetary Policy as Headwinds Shift to Tailwinds Since the speech is mostly boilerplate with a catchy title, I´ll jump straight to the conclusion, In many respects, the macro environment today is the mirror image of the environment we confronted a couple of years ago. In the earlier period, strong headwinds sapped the momentum of the recovery and weighed down the path of policy. Today, with headwinds shifting to tailwinds, the reverse could hold true. She doesn´t mention that the “winds have shifted” several times in the past eight years. In fact, the latest shift… Read More

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There´s the “fiction” (or farce) & the fact

Both Yellen and Powell kicked-off their Congressional Testimony with the same “upbeat” views: Yellen´s first 2/11/14 The economic recovery gained greater traction in the second half of last year. Real gross domestic product (GDP) is currently estimated to have risen at an average annual rate of more than 3-1/2 percent in the third and fourth quarters, up from a 1-3/4 percent pace in the first half… Powell´s first 2/27/18 Inflation-adjusted gross domestic product rose at an annual rate of about 3 percent in the second half of 2017, 1 percentage point faster than its pace in the first half of… Read More

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January FOMC Meeting – Extended discussion of inflation forecasting

Following the staff presentations, participants discussed how the inflation frameworks reviewed in the briefings informed their views on inflation and monetary policy. Almost all participants who commented agreed that a Phillips curve-type of inflation framework remained useful as one of their tools for understanding inflation dynamics and informing their decisions on monetary policy. Unfortunately, they overlook the fact that Phillips Curves do not depict a structural relation. The Phillips Curve is not invariant to monetary policy behavior. In short, it is the Fed that creates the correlations between inflation & unemployment. The Lesson: Phillips Curve analysis is not a reliable… Read More

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“Peace with honor” regarding inflation?

From reports: Federal Reserve policy makers are openly voicing their willingness to accept above-target inflation even as price pressures are beginning to build. “Let me be clear: A small and transitory overshoot of 2 percent inflation would not be a problem,” William Dudley, president of the Federal Reserve Bank of New York, said in a Jan. 11 speech. “Were it to occur, it would demonstrate that our inflation target is symmetric, and it would help keep inflation expectations well-anchored around our longer-run objective.” If that sounds ridiculous it´s because it is! “Even as price pressures are beginning to build”. Inflation may… Read More

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Marvin Goodfriend has been nominated to the Federal Reserve Board, waiting for Senate confirmation. He comes to the Fed at a critical moment. Critical, because the Fed is in the process of rethinking its monetary policy framework. As Ben Bernanke said in a recent gathering at the Brookings Institution: Former Federal Reserve Chairman Ben Bernanke predicted that the central bank’s new leadership will study alternate regimes for monetary policy over the next year to 18 months. “There will be some pretty serious discussions” on policy frameworks at the Fed under the chairmanship of Jerome Powell, Bernanke said Monday. He said Powell… Read More

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John Williams suggests an alternative monetary policy framework

His argument: Potential output—the maximum amount an economy can produce over the long run—is an important indicator policymakers use to gauge a country’s current economic health and expectations for future growth. However, potential output can’t be observed directly, and estimating it is difficult, even with modern, sophisticated methods. Monetary policymakers are well advised to account for the perennial problem of uncertainty surrounding these estimates in devising and carrying out policy strategies. He suggests an alternative: In light of the reality that measuring potential output is very difficult despite the best efforts, it pays to avoid overreliance on these estimates when… Read More

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Jerome Powell´s inheritance

First let´s look at Yellen´s tenure. This was the first time since 1951 that a Fed Chairperson that completed his first term was not appointed for a second stint. It was also the first time during the same period that a Fed Chair did not preside over a recession in his first term. For the first time, also, unemployment only decreased. Inflation remained low as it had for the past 25 years. One could conclude that Janet Yellen had the most successful first term as Fed Chair in the post war period…but didn´t get reappointed! Note, however, that Yellen´s tenure… Read More

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The meaning of “Solid” is elastic

From the Statement: “Economic activity has been rising at a solid rate despite hurricane-related disruptions.” The chart shows annualized growth during this “expansion”. Average growth since 2015 is the same as average growth from 2010 to 2014, about 2.1%. Since 2014, what has changed is the volatility of growth, which has dropped by almost half. The only thing that has remained inelastically “solid” is the deepening of the economic contraction!

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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… Read More

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