FOMC Watch

With almost imperceptible changes from the previous statement, today´s statement reads: Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further. Inflation is expected to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely… Read More

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“If you keep on this track I will push you off”. What is the rational response to this statement? Keep on the track or get off the track. Time and time again members of the FOMC say just this. Today we read this report of a dinner last night “If the economy stays on its current trajectory I think … we’ll see an interest rate hike later this year,” New York Fed President William Dudley told a modest dinner gathering at the Lotos Club, downplaying any market-related risks of tightening monetary policy in December. The response of the USD Index to a… Read More

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Yellen vs Fischer or Yellen & Fischer?

Stanley Fischer: There are at least three reasons why we should be concerned about such low interest rates. First, and most worrying, is the possibility that low long-term interest rates are a signal that the economy’s long-run growth prospects are dim. Later, I will go into more detail on the link between economic growth and interest rates. One theme that will emerge is that depressed long-term growth prospects put sustained downward pressure on interest rates. To the extent that low long-term interest rates tell us that the outlook for economic growth is poor, all of us should be very concerned,… Read More

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In her opening remarks at the Boston Fed Conference on “The Elusive ‘Great’ Recovery: Causes and Implications for Future Business Cycle Dynamics“, Janet Yellen poses a few questions. Two of those stand out. The first question I would like to pose concerns the distinction between aggregate supply and aggregate demand: Are there circumstances in which changes in aggregate demand can have an appreciable, persistent effect on aggregate supply? Prior to the Great Recession, most economists would probably have answered this question with a qualified “no.” They would have broadly agreed with Robert Solow that economic output over the longer term is primarily… Read More

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Fischer's Bromdes

Fischer goes on about the usual FOMC memes that the labor market is strengthening, that real growth has recently been low because of inventory corrections, that inflation is below target because of the strong dollar and weak oil prices, but that given the strengthening labor market and as the rise in the dollar and fall in oil prices dissipate, inflation will climb back to 2%. That sets the stage for him to talk about monetary policy: Given that generally positive view of the economic outlook, one might ask, why did we not raise the federal funds rate at our September meeting?… Read More

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In a country a long way away a dove turned into a hawk. Charles Evans has been consistently on the side of the doves for many years, although he did blot that record with a vote to raise rate in December 2015. In his extremely long speech in New Zealand yesterday he was dovish: Most worrisome to me is the possibility that inflation expectations in the U.S. might be drifting lower. … If we were going to see a quick return to 2 percent inflation, I would have expected to have already heard hints bubbling up from among my contacts. But in remarks to… Read More

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Paul Romer recently lamented on the current crisis in macroeconomics. The money quote to excusing the pun was that:  Macroeconomic theorists dismiss mere facts by feigning an obtuse ignorance about such simple assertions as “tight monetary policy can cause a recession.” Stanley Fischer, Deputy Governor of the Federal Reserve, is one such theorist Romer had in mind. His recent speech on Low Interest Rates is faintly astonishing in not once suggesting that low interest rates might be caused by tight monetary policy. As usual, with the central bank-sponsored macroeconomic groupthink everything is to blame for persistently low interest rates except… Read More

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Today: Though her speech to the House of Representatives’ Financial Service Committee avoided remarks on monetary policy, Yellen admitted in the Q&A period that if job creation continued at its current pace it could lead to overheating of the American economy which in turn would require a more rapid removal of accommodative monetary policy. In November 1996: In spite of all that is going right in the American economy, I too remain concerned about the outlook. I agree with the staff that we may well be living on borrowed time and that inflation will eventually accelerate if the unemployment rate remains… Read More

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In a speech called “Why Study Economics” to students at Howard University Stanley Fischer attempted to shed some light on a key macro issue. He failed. Illustrating his own confusion about macroeconomics, despite years and years of study, and despite hundreds of research papers, some of which were authored by him. “Why is participation in our nation’s labor force declining? … Economists are examining a number of reasons why prime-age males are falling out of the labor force. Here there are differences among economists. Some economists have emphasized the role of public assistance programs, such as disability insurance. Some evidence… Read More

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The September meeting released a new set of projections from FOMC members for the Real GDP growth, the unemployment rate, PCE inflation, core PCE inflation and the expected path of the Fed funds rate. Real GDP is expected to be around 2%, unemployment to remain below 5%. PCE inflation is expected to accelerate from the current 1% to 2% and remain there. The chart is almost comical. The 2% projections look like a ceiling, and are a ceiling. If the projections breached 2% the FOMC would be tightening, no doubt at all. They want to tighten now but common sense… Read More

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