Monthly Analyses

The bane of the Zero Lower Bound

For more than 20 years, at a time when inflation had been low and stable for more than a decade, central banks began to discuss “Monetary Policy in a Low Inflation Environment”. Several conferences and papers on the issue followed. This one, from 2000, has a readable discussion and plenty of references. The abstract reads: One of the most striking macroeconomic phenomena in recent decades has been the achievement of rather low and more stable rates of inflation in many countries in the nineties. Consequently, the main goal of this paper is to offer an overview of the main policy…...

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When poor economic reasoning prevails

Suddenly, we seem to have forgotten the most basic of lessons: that inflation is a monetary phenomenon. However, given that inflation remains low, in spite of low unemployment, the absence of inflation is dubbed a mystery. In the opposite direction, a few years ago when unemployment was high, the absence of disinflation/deflation was also dubbed a mystery. The chart shows that inflation, measured by the PCE-Core has remained stable and low for a very wide range of unemployment rates. This should give pause to proponents of the Phillips Curve. Unfortunately, it doesn´t and the reason for that may be, as…...

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Fed has become tiresome

Regarding inflation, “temporary”, “transitory”, is the defining idea. Now, however, the Fed confesses that it´s understanding of inflation is imperfect. …my colleagues and I currently think that this year’s low inflation is probably temporary, so we continue to anticipate that inflation is likely to stabilize around 2 percent over the next few years. But our understanding of the forces driving inflation is imperfect, and we recognize that something more persistent may be responsible for the current undershooting of our longer-run objective. Accordingly, we will monitor incoming data closely and stand ready to modify our views based on what we learn.…...

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“Fake” Puzzles

They are Phillips-Curve related: An extended run of modest labor market gains this year has produced little acceleration in wage growth or inflation, underscoring a puzzle that complicates Federal Reserve policy decisions looming in the months ahead. One place some are trying to find a solution is in “demography”. An example from the San Francisco Fed: Simply stated, new entrants to full-time work, whether they are entering for the first time, re-entering from periods of involuntary or voluntary non-employment, or moving from part-time to full-time work, are more likely to make below-average wages. Counterintuitively, this means that strong job growth can pull…...

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In July, monetary tightening bias reinforced

There were “pearls of wisdom”: “We need to see the economy slow down a little bit … because I think eventually inflation pressures will emerge,” Williams tells reporters. In his speech, San Francisco Fed president Williams also says: The theme of my talk is that monetary policy is reaching its limit as to what it can do to generate economic growth. Other actors—in both the private and public sectors—need to step up and take the lead in making the investments and enacting policies needed to improve the longer-term prospects of our economy and society. Which is the same story told…...

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June and the “Draghi Effect”

June was progressing according to expectations. A rate hike at the June 14 FOMC meeting was a given, so it should not have much of an effect on anything. In effect, the 10-2 spread was falling on those expectations, as was the 5yr-5yr forward inflation expectations. The big move at the closing of the month reflected Draghi´s unexpected hawkish comments on the 27th, which helped lift rates around the world. Suddenly we hear hawkish comments from the major central banks, including the Fed, ECB, BoE, BoC and the RBA. Important to note that the last time the major central banks…...

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For some at the FOMC, it´s all about the “unemployment theory of inflation”

As reported: Officials say they remain confident such low unemployment will be enough to lift inflation toward their 2% target in coming years, meeting the Fed’s twin objectives of stable prices and maximum, sustainable employment. There are, however, exceptions. One is Bullard: The U.S. unemployment rate declined to 4.4 percent in the April reading. Does this mean that U.S. inflation is about to increase substantially? The short answer is no, based on current estimates of the relationship between unemployment and inflation. Another is Lael Brainard, albeit more tentatively: I see some tension between signs that the economy is in the…...

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Myth & Reality

On March 15, the Fed increased the policy rate by 25 basis points and more or less promised at least two more hikes by year-end. Earlier in the month, Yellen made a speech in which she said: I will spend most of my time today discussing the rationale for the adjustments the Committee has made since 2014, a year that I see as a turning point, when the FOMC began to transition from providing increasing amounts of accommodation to gradually scaling it back. On March 29, two weeks after the rate hike, San Francisco Fed president John Williams was even…...

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The “Ides of March”

Trump is becoming increasingly isolated politically. He got clobbered both in his immigration restriction initiative and on his promised repeal of Obamacare… Meanwhile, March also saw the Fed confirming our conjecture that it was “Fed up with foot dragging”. And that´s not a pretty sight. According to San Francisco Fed president John Williams: I recently gave a talk to some business leaders back in California, and I found myself describing the Fed as an “amazingly nerdy group of people who pore over data, computer models, and statistical analysis.” So I hope you’ll take it as a compliment when I say that being…...

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Fed “Fed up with foot-dragging”

The second half of the month of February was notable for Fed “consistency” (note: nv=non-voting member) 14-Feb Janet Yellen: “Further adjustment likely needed if economy on track”. 14-Feb J. Lacker (nv): “Next hike should come sooner rather than later”. 15-Feb E. Rosengren (nv): “2017 growth could require faster rate hikes”. 15-Feb N. Kashkari: “Have to wait and see on new fiscal policies”. 22-Feb D. Lockhart (nv): “March is a live meeting”. 24-Feb J. Powell: “March hike is on the table”. 27-Feb R. Kaplan: “Should move sooner rather than later”. 28-Feb P. Harker: “3 hikes are appropriate this year”. 28-Feb J.…...

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