Blog

Echoes from the distant past show nothing has been learned

The discussion today: The unemployment rate dropped to its lowest level in nearly 18 years in April, feeding a debate that has long puzzled economists: How low can joblessness fall before a boon for the economy turns into a burden? Flash back more than twenty years. In 2001, Alan Blinder and Janet Yellen published “The fabulous decade – Macroeconomic lessons from the 1990s”. In chapter 6 “The Fed forbears and the Phillips Curve cooperates”, we read: The state of the U.S. economy looked superb at the start of 1996, and it just kept getting better over the ensuing years. The… Read More

Share

Australia, like the West Coast and some other regions of the US, or Canada and Great Britain, faces an explosion in house prices. The Reserve Bank of Australia recently issued a study concluding that in 2016 a whopping of A$488,944 of a typical A$1.16 million house price in Sydney was due to tight property zoning.  The RBA also says the zoning costs have been worsening. As bad as that is, I suspect the RBA actually understates matters, as they seem accept on face surging Sydney land values. But with an abundant supply of free-market housing, how valuable would Sydney land… Read More

Share

The Q1 unit labor cost figures, released last week, again are revealed as a drag on the US Federal Reserve putative 2% inflation target. The Q1 unit labor costs reading for the U.S is up 1.1% y/y and also up 0.8% from Q2…of 2016, reports the BLS via FRED. Yes, you read that right. Unit labor costs are close to flat-lining.  If the Fed wants to hit its 2% target, and if it wants wages to help it get there, it will have to find way to get wage growth up. Might one suggest stronger aggregate demand? “Labor Shortages” Back… Read More

Share

The inflation “excitement”

With headline PCE ticking at 2% and the core version, free from the “wireless base effects”, clocking 1.9%, it was expected that the FOMC Statement would reflect those advances. Quite the opposite happened, with the Statement “playing them down”: Inflation on a 12-month basis is expected to run near the Committee’s symmetric 2 percent objective over the medium term. The chart shows that for the past 63 months, headline PCE reached 2% (or above) on only three occasions. All are associated with a rise/spike in the price of oil. The next chart indicates that headline PCE inflation is an “oil… Read More

Share

FOMC Funk

Long-term rates recently crawled up. On rising long-term rates, there are two theories. In the first, they signal an improved economic outlook, which leads investors to anticipate a swifter hike in rates. In the second, they are rising because of a change in investor expectations of a swifter rise in rates, independent of economic conditions. A swifter rise in rates is expected. According to recent views of FOMC members: Chairman Jerome Powell April 6, Chicago “As long as the economy continues broadly on its current path, further gradual increases in the federal-funds rate will best promote these goals.” Governor Lael Brainard April… Read More

Share

The shape of a “late-cycle cyclical recovery”

That has been misdesignated “synchronized global recovery”. What we observe, however, is simply an “offset” to the previous slowdown. The pattern shows up in the IMF´s world growth data. It is also present in higher frequency global economic activity data – world industrial production & world trade. In both cases, the “recovery” seems to have run its course and danger, in the form of “trade wars” lurks ahead! In the U.S., the pattern also shows up. I´ll posit that the process is driven by nominal spending (NGDP) growth, in other words, by monetary policy. And is reflected in economic activity… Read More

Share

The sure-fire way of stabilizing the real economy or, “all roads lead to Rome”

At Vox, Walentin and Westermark write, “Stabilising the real economy increases average output”: The intro: The Great Recession has generated a debate regarding the potential effects on the long-run levels of output and unemployment of stabilising the real economy (e.g. Summers 2015). This issue takes on additional importance as the current economic situation in some countries, including the US, imply that there is a monetary policy trade-off between stabilising inflation and the real economy. In particular, the unemployment level is low at the same time as inflation is low. More generally, the question at hand is whether policymakers, in particular… Read More

Share

Price Level targeting would not have avoided disaster in 2008

Raphael Bostic, Atlanta Fed president, is arguing for a change in the monetary policy framework, from inflation targeting (IT) to price level targeting (PLT) See here, here.& here. What I want to show is that, although PLT differs from IT in that PLT has a “memory”, it suffers from the same weakness, i.e. it is sensitive to supply (for example, oil) shocks. In addition, I argue that an alternative monetary policy framework, NGDP level targeting, also has memory but does not suffer from the supply shock sensitivity of PLT. Ten years ago, the FOMC was “laser focused” on inflation. In… Read More

Share

Monetary Policy Potpourri

Monetary Policy Framework Raphael Bostic, president of the Atlanta Fed has a three part (so far) series on Thoughts on a Long-Run Monetary Policy Framework. His preferred framework is for the Fed to adopt price level targeting. Bostic writes: [f]ormer Fed chairman Alan Greenspan offered a well-known definition of what it means for a central bank to succeed on a charge to deliver price stability. Paraphrasing, Chairman Greenspan suggested that the goal of price stability is met when households and business ignore inflation when making key economic decisions that affect their financial futures. I agree with the Greenspan definition, and… Read More

Share

In contrast to the proverbial monkey, there are those that “see, hear & speak” inflation

From Goldman Sachs: “During most of the post-crisis recovery, inflation risks have been subdued. However, concerns with “overheating” and higher inflation are now being raised given a combination of strong global growth and diminishing economic slack, increasing labor market tightness, expansionary fiscal policy vs. only gradual normalization of monetary policy in the U.S., risks from trade protectionism / retaliation, and the potential for higher commodity spot prices as inventories continue to draw down,” writes Goldman Sachs strategist Michael Hinds. “There’s really no question – inflation is rising.” –  @inflation_guy His yardstick: The New York Fed “Underlying Inflation Gauge” (UIG) “Underlying… Read More

Share