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In “Years of Fed Missteps Fueled Disillusion with the Economy and Washington”, Jon Hilsenrath gives his contribution to the “Great Unraveling” series. He starts off writing: In the past decade Federal Reserve officials have been flummoxed by a housing bubble that cratered the financial system, a long stretch of slow growth they failed to foresee and inflation persistently undershooting their goal. In response they engineered unpopular financial rescues, launched start-and-stop bond buying and delayed planned interest-rate boosts. “There are a lot of things that we thought we knew that haven’t turned out quite as we expected,” said Eric Rosengren, president of the… Read More

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Stephen King (not the popular author) but HSBC’s senior economic adviser, elaborates on Larry Summers´ comments on San Francisco Fed president John Williams´ letter. King´s conclusion, however, in effect disparages the idea of NGDP Targeting. Maybe he doesn´t understand the concept: In these circumstances, the entire monetary policy framework is up for grabs. Shibboleths will have to be dispensed with. At zero rates, central banks may have to work increasingly closely with finance ministries, prioritising the need for co-ordinated action over the desire for independence. Inflation targeting may have to be ditched, perhaps replaced by nominal gross domestic product targeting:… Read More

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We were rightly excited by John Williams letter from San Francisco on Monday as we had already detected stirrings. We and many others were also equally right to wonder what was going on when JW reverted to type on Thursday. The JW-induced downward move in the USD Index stuck. The move down was against all major currencies but specifically against the JPY where it fell through Y100 to the USD for a while on Tuesday and more persistently on Thursday. The Japanese were repeatedly browbeaten by the US Treasury when their currency versus the USD had traded up to Y120. They did what they were told, pulling back… Read More

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For example: Indeed, Alex Tabarrok, an economist at George Mason University, argues that it’s “crazy” to believe that a lack of demand explains the slow recovery. “The time period in which monetary policy would have been effective is long over,” he says. Once an economy reaches full employment, he argues, there’s no way for increased spending to boost economic output — you’d just get more inflation instead. And the US unemployment rate is currently 4.9 percent, near historic lows, a sign that a shortage of demand might not be a problem right now. Or Mark Zandi, chief economist of Moody’s… Read More

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One of Scott Sumner’s great contributions to economics (blogging) has been his oft-repeated mantra of “not reasoning from a price change”. Probably its most familiarusage  is related to the oil price, although there are many, many more. The oil price case The 2014 collapse in oil prices was heralded by many financial types and economists as a great boon to wealth creation, a sort of hidden tax cut. What Scott tirelessly pointed out is that if the oil price drop was as a result of a drop in demand then the cut in price would not herald a rise in wealth,… Read More

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Marcus Nunes, Jun 5 2016 For the past two years, the Fed has insisted that the time for “policy normalization” has come. At the very start of this year, none other than Vice Chair Fischer said that four rate hikes in 2016 were “in the ballpark”. We´re almost halfway through the year and nothing has yet happened, and it appears the “highly touted” June hike is “off the table”, and July has become much less likely. It appears that the Fed has no idea about the monetary policy it is actually practicing. So, let´s help them find out! Go back… Read More

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Marcus Nunes May 20, 2016 Dean Baker writes: “As talk grows of a June interest rate increase, where’s the data to support it?”: Weak data had convinced many that the Federal Reserve was unlikely to raise interest rates in June, but in recent days multiple Fed policymakers have suggested that an increase should be on the table in the near future. What’s unclear is why. Little new data have emerged to suggest that the economy is much better than it was six or nine months ago. Since interest rates were raised in December, in fact, the pace of economic improvement has slowed almost to a stall. All… Read More

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Marcus Nunes, May 17, 2016 My partner James Alexander sent me something that gave me this idea… And the “dead”, as you may have surmised, is Inflation! As the chart depicting (from the Atlanta Fed Inflation Project) the flexible and sticky CPI YoY inflation makes very clear, inflation has been dead for at least a quarter century. What the chart makes clear: An inflationary process, like during the “Great Inflation” of the 1970s, is characterized by increases in both the flexible and sticky components of the CPI (or any other price index) When you have price shocks like in the… Read More

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James Alexander, April 27, 2016 As expected the FOMC made no change to its target rate. But we still think that the discussions at the FOMC are much more lively than they have been. Somehow, the “normalization” program pressed by the Fedborg and championed by the anti-prosperity inflation hawks has been delayed. Hooray! We reckon that some of the newbies on the FOMC, particularly Neel Kashkari are shaking things up a bit. In an internal interview released the other day he made the refreshingly honest statement: “Clearly what happens in global financial markets, as an example, will affect the U.S. economy. We can’t… Read More

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James Alexander/Apr 05, 2016 What is more important the short, medium or long term? The recent gyrations of the EUR/USD exchange rate have grabbed a lot of attention since the start of the year. In theory the strong easing bias of the ECB versus the confusing position of the Fed should mean the EUR weakens versus the USD. Or should it? That currency story based on the stance of the respective central banks is surely “in the price” already. The new information that could shift the EUR/USD is more debate about what more the ECB thinks it can do within… Read More

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