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The Fed and the inflation obsession

From Yellen´s latest speech: Speaking on the eve of Donald Trump’s inauguration as the 45th U.S. president, she said the economy remains constrained by multiple long-term forces. “Economic growth more broadly seems unlikely to pick up markedly in the near term given the ongoing restraint from weak foreign demand,” rising interest rates, an aging population and other factors, she said. Still, she said, the Fed doesn’t want to wait too long to raise rates and let inflation get out of control. So, it will likely be “prudent to adjust the stance of monetary policy gradually over time,” she said, repeating… Read More

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“Menace vs. Magoo”

Amidst the commotion and brickbats of the Trump inauguration, monetary policy continues to tighten. We like to monitor Base Money as regularly as possible. There is often noise around the end of the year so it takes a while for the trend to be clear, but the quiet shrinkage is still very visible, driven by increased Treasury deposits replacing bank reserves plus the “sales” of assets via Reverse Repos. The YoY fall in Base Money seems to be settling down at around 7-8% per annum, not dramatic but enough to continue the slowing of nominal growth seen since after the… Read More

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We try to focus on monetary policy at NGDP Advisers. We also try to see what markets are telling us about the stance of monetary policy. The USD fell over 1% today. Why? Trump said it was too strong. In a related move, US bond yields also fell across the spectrum, continuing a trend over the last few weeks or so – mysteriously interrupted last Friday. A weakening of momentum in the economic surveys possibly meant that confidence in rate hikes lessened, and has alerted the very economically sensitive Trump to the negative impact on growth coming from the strong USD… Read More

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Appraising the state of the economy

Just as it is misleading to gauge the stance of monetary policy from the level of interest rates, it is also misleading to appraise the state of the economy from the rate of unemployment. Recently, Ken Rogoff said: “The Fed will tighten three times, they might even tighten four times” and “still be behind the curve,” said Harvard University economics professor Kenneth Rogoff in an interview with MarketWatch. In the same publication, here´s Raghuram Rajan: “If the U.S. slowly starts recognizing that with the economy close to full employment, the normal rules of economics will start playing out again, and,… Read More

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Bedazzled by 2.9% wage growth

Our close friend Scott Sumner seemed to fall into a trap at the weekend, heralding the 2.9% year on year growth in Average Hourly Earnings as making it “almost impossible to continue arguing for labor market slack”. Well, it is good he had the caveat, as the AHE data series that grabbed the headlines looks highly questionable. Relying on journalists and the rest of the crowd leads to big mistakes. Year on year Average Weekly Earnings growth for “Production and Nonsupervisory Employees: Total Private” fell from 2.1% to 1.9%. “Almost no slack” makes almost no sense. The 2.9% figure that grabbed the… Read More

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Jason Furman´s self-congratulatory farewell

He writes: …While these potential stumbling blocks, and longer-term economic challenges, remain, I have been deeply proud to see the recovery strengthen over the years and to pass the baton to the next Administration with an unemployment rate below 5 percent, the economy growing strongly, consumer confidence at its highest point in nearly a decade, a safer, more stable financial system, and a broadly positive economic outlook in the coming years. It´s beyond my comprehension! If we compare two deep recessions and their aftermath, you can see that one exhibited a strong and quick recovery while the other languishes in… Read More

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Putting Construction Spending into Perspective

You may have seen the recent headlines about the stronger than expected construction spending report for November. One of the points certain outlets made about the report was the frankly banal observation that spending is now at an “all time high”. Spending-linked variables, in an economy with some sort of persistent inflation rate and population growth (that is to say, not Japan) should always be near all-time highs and breaking new highs frequently. Think stocks/corporate earnings, personal income or any other subcomponent of GDP. It might not be completely useless information, to know that construction spending finally passed the old… Read More

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Monetary straitjackets are not easy to take off

Faster inflation is expected given the trends in breakeven inflation rates. Bond yields have risen as rate expectations have risen in a sort of arms race between expected inflation and expected rate rises to calm the expected inflation. This is only partly driven by expectations of economic trends, a related part is the expected liquidity impact of higher supply of bonds to fund the fiscal policies themselves. This powerful cocktail drives down bond prices independent of inflation expectations. Our market-influenced NGDP Forecast is not yet showing faster nominal growth. (Please take out a free trial or subscribe to see our proprietary chart… Read More

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Lovely Headline: “The balance of evidence suggests the U.S. is not in a recession.”

That wasn’t a sure bet when the year was young. Over the first half of 2016, various indicators pointed to a possible recession in the not-too-distant future: sharp declines in stock markets and a slowdown in job creation, falling corporate profits and contraction in the factory sector, stalled temp hiring and decelerating car sales. But as 2017 approaches, most—though not all—of those yellow warning lights have turned green again. This alternative headline “The balance of evidence suggests the U.S. is not in a recovery” much better reflects the spirit of the time. It is clearly visible in the chart. Note that “warning lights” move from yellow to green and… Read More

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The PCE Chain-type Price Index Standard

Believe it or not, there are still people worried about inflation, about the US dollar losing its value. It is not hard to find articles where complaints about how the dollar has “lost its value” since 1913, 1936 or 1972, various points where the dollar was gradually shifted toward its modern “fiat” standard. Yes, the dollar is a fiat currency. The US Treasury gives no guarantees to redeem dollars for any commodity. In fact, the US Treasury does not even make dollars anymore! The Fed does. Yet it is manifestly not true that the dollar isn’t in a de facto… Read More

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