Macro Issues

The flattening yield curve: What it means

In an economy with an interest rate policy target (most countries, including the US), rates, in general, give us a straightforward forecast of the most likely value for future policy rate level. We currently have a situation in the US Treasury market where yields are compressing together across maturities, i.e. the yield curve is flattening.

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Why has output expanded slowly in this cycle? A market monetarist perspective

To many, this fact remains a puzzle, especially because the unemployment rate has returned to pre-crisis levels. Maybe by looking at another “deep recession moment” we may “solve” the puzzle. The 1981-82 recession and ensuing recovery comes to mind as a possible control. The first chart compares the two downturns. The 1981-82 downturn was much

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There’s no “Conundrum”

As recounted by Greenspan in chapter 20 of his memoir “The Age of Turbulence”: “What is going on? I complained in June 2004 to Vincent Reinhart, director of the Division of Monetary Affairs at the Federal Reserve Board. I was perturbed because we had increased the federal Funds rate , and not only yields on

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The Fed embraces the Phillips Curve to everyone´s chagrin

And on they go in the wrong direction. In the news conference Wednesday, however, Yellen defended the Fed’s policy of gradual rate hikes as forestalling a situation that could be much more damaging for disadvantaged groups. “We want to keep the expansion on a sustainable path and avoid the risk that … we find ourselves

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Puzzling Surprises

Lael Brainard, a prominent member of the Fed’s board of governors, made the following admission in a recent speech, highlighting what policymakers see as economic puzzle: “At a time when the unemployment rate has fallen from 8.2% to 4.4%, core inflation has undershot our target for 58 straight months.” And: Albert Edwards, strategist at Societe Generale, is

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In trying to “square the circle”, the Fed is courting disaster!

Tim Duy summarizes the problem as the Fed sees it: The Federal Reserve can’t catch a break on the inflation numbers, which are simply not helping in its drive to normalize monetary policy. Monetary policy makers have three possible responses to the weak inflation data. First, they can define down the extent of an acceptable

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Unfathomable Monetary Policy Parameters

While Stanley Fischer defended central bank discretion, John Williams, of the San Francisco Fed defended a change in the monetary framework and strategy, arguing for a change in the monetary policy target, from inflation targeting to price level targeting: It’s been said that “getting over a painful experience is much like crossing monkey bars. You have

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U.S. orthodox macroeconomists are criticizing the Trump Administration’s proposed business tax cuts for widening federal deficits in the years ahead, by possibly a few trillion dollars. But why? Do we not live in the Age of Mobius-Strip Economics? The central bank the Bank of Japan has been buying back trillions of dollars of Japanese government

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The ZLB is a Central Bank ‘construct’

In his latest post, Bernanke starts off: If inflation is too low or unemployment too high, the Fed normally responds by pushing down short-term interest rates to boost spending. However, the scope for rate cuts is  limited by the fact that interest rates cannot fall (much) below zero, as people always have the option of

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How monetary policy unraveled

Today, George Selgin posted A Stable Spending Catechism, a nice primer on NGDP Level Targeting. Here I show how the Fed´s monetary policy unraveled when it forfeited “Stable Spending growth”. In the 1990s, a period known in economics as the “Great Moderation,” it seemed the Fed could do no wrong. Policy makers and voters saw

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