Macro Issues

Does quantitative easing (QE) work? It is tempting to draw analogies along the lines of, “If a nation has to ask if it is winning a foreign war 10 years after initiating hostilities….” Stephen Williamson, economist formerly of the St. Louis Fed, argues that quantitative easing is a dud. Regional Federal Reserve banks on three occasions (at least) have issued studies that QE is not inflationary, and but only faintly stimulative. Certainly, present-day Japan is not a comforting example. In recent years, the Bank of Japan has bought back 45% of outstanding Japanese government bonds (that is saying something, btw),… Read More

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The myth of “synchronized global growth”

For some months now, that has been the narrative. The Fed has embraced the idea, with new chair Powell introducing “avoidance of overheating” in his first speech (testimony), while resident dove Brainard, as her “wind analogies”, which swirled from “head” to “tail”, has changed from dove to hawk. As this parsing of Brainard´s speech put it: Brainard: Cutting to the chase, I am now a hawk At the very start of her speech, Brainard says: Many of the forces that acted as headwinds to U.S. growth and weighed on policy in previous years are generating tailwinds currently. Today many economies… Read More

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The “Taper Tantrum” revisited

In the recent Booth School of Business conference in New York, a handful of authors, from academia and the markets, conclude: “Our procedure attributes most of the bond market selloff during the 2013 ‘taper tantrum’ to better economic news rather than to changing expectations for the end of balance sheet expansion,” the authors wrote. Independently, David Andolfatto in a blog post reaches a similar conclusion: Consumption growth turned positive in 2013.4, and continued to climb well into 2015. So while the tantrum may have contributed to the spike up in yields, the reason they stayed higher is because of an… Read More

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To link inflation and unemployment, you don´t need the Phillips Curve

Recently Joe Gagnon of the PIIE (Peterson Institute for International Economics) has used both the US and Japan to argue that there is no inflation puzzle. In other words, the Phillips Curve is alive and well. In the US piece, Gagnon writes: Some economists are puzzled over why US inflation has remained low while the economy has reached, or even exceeded, potential employment. Commentators have argued that central banks are wrong to place too much faith in the Phillips curve model, in which inflation responds to deviations from potential employment…, Yet inflation is behaving exactly as the Phillips curve would… Read More

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“Cost-push” & “Cost-pull” theories of inflation

In the 1960s and 1970s, “cost-push” was the great explainer of inflation. On the pro side, a group of highly influential economists: Paul Samuelson – Nobel winner James Tobin – Nobel winner Walter Heller – CEA Chair Gardner Ackley – CEA Chair Arthur Okun – CEA Chair Arthur Burns – Fed Chair On the contra side, advocating monetary causes for inflation, an almost lone voice: Milton Friedman – Nobel winner Just one example from the “cost-push” side: As late as 1979, just as Paul Volcker was getting appointed Fed Chair and about to start a monetary experiment to curb inflation,… Read More

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The DWL Cycle

Deepest (contraction) Weakest (recovery) and (soon to become) Longest (expansion). There are some interesting features to the DWL cycle. As the chart below indicates, the DWL cycle started off very mild, being one of the mildest three quarters into the recession. Then, when many of the other cycles were beginning their expansion phase, the DWL cycle turned markedly “south”. Why? That´s the moment the Fed, having tightened monetary policy on account of a misguided worry about headline inflation, which was being buffeted by the ongoing oil shock, decided to “micromanage” the economy by providing “rescue services”, mostly to the financial… Read More

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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. The compression is most pronounced in the near-dated end, where 1- and 2-year instruments are yielding much closer to 5-year bonds than they were in, say, 2014. The yield curve is not currently flat, just moving closer to a position of moderate flatness, indicating that… Read More

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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 more acute. That contrasts with the 2007-09 downturn, which was initially quite tame. Why the “delayed” reaction? A possible answer looks to what was happening to monetary policy (NGDP growth). Initially, in both instances, NGDP didn´t change much. However, keep in mind that just prior… Read More

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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 ten-year treasury notes failed to rise, they’d actually declined. It was a pattern we were accustomed to seeing only late in a credit-tightening cycle, when long-term interest rates began to fully reflect the lowered inflation expectations that were the consequence of the Fed tightening. Seeing… Read More

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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 in a situation where we’ve done nothing, and then need to raise the funds rate so rapidly that we risk a recession,” she said. “But we are attentive to the fact that inflation is running below our 2 percent objective.” William Dudley, president of the… Read More

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