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Marcus Nunes/Feb 4, 2016 Draghi Warns on Risks of Low Inflation European Central Bank President Mario Draghi hit back at a warning from Germany’s Bundesbank that the ECB shouldn’t overreact to a sharp drop in oil prices, underlining his readiness to launch additional stimulus to shore up ultralow inflation. In a speech at the Bundesbank’s home in Frankfurt, Mr. Draghi warned that central banks “cannot be relaxed” in the face of a series of shocks to commodity prices. “The longer inflation stays too low, the greater the risk that inflation does not return automatically to target,” Mr. Draghi said. Cheaper… Read More

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Marcus Nunes/Feb 4, 2016 Janet Yellen and the Federal Reserve are on another planet: That’s the message from global investors who are sending the Fed a big distress call to come back to earth. The Fed is still predicting four interest rate hikes this year, but the market now forecasts zero hikes in 2016. The closely watched Fed Futures market now has a nearly 60% probability of no rate hikes at all this year. It’s a dramatic U-turn from only a month ago when the market was pricing in a 75% probability the Fed would increase rates at least once… Read More

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James Alexander/Feb 3, 2016 The role of the President of the NY Fed is to be the lightning conductor of market sentiment to the FOMC. The NY Fed is the operating arm of the FOMC, conducting the open market operations. Because of this importance the President of the NY Fed gets a permanent vote at the FOMC, alongside the senior Fed staffers like Yellen and Fischer. What the NY Fed President says is important, often more so than the Vice-Chairman of the Fed, currently Fischer, or sometimes even than the Fed Governor themselves. While Dudley has always physically looked uncomfortable… Read More

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James Alexander/Feb 3, 2016 Back in late October we highlighted the collapse in growth of UK NGDP as proxied by the release of the 3Q15 Nominal Gross Value Added (GVA) figure. Things have now worsened. Growth has dropped from 2% YoY to less than 1%. Where is the Bank of England? Where are their political masters, the UK Treasury? Are they all asleep at the wheel? Hello? Wakey, wakey! It is not just the risk of falling revenues leading expense reductions combining with the usual “sticky wages problem” forcing employers to cut staff, although this should be alarming enough on… Read More

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Marcus Nunes/Feb 2, 2016 In early January, he thought four rate hikes in 2016 was in the “ballpark”. In a speech yesterday he was less sanguine, but still believes monetary policy remains accommodative. The framework under which the Fed operates, which Kocherlakota, who knows what he´s talking about, clearly set out recently, permeates the Fischer´s speech: “gradual” and “normalize”. According to Fischer: “[M]y colleagues and I anticipate that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate, and that the federal funds rate is likely to remain, for some time, below… Read More

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Benjamin Cole/Jan 31, 2016 In general, the “class glass” is a poor lens for analyzing U.S. politics and macroeconomic policies. To be sure, the nation has interest-group politics in spades, and groups are often well-financed. And certainly, whenever past Dallas Fed President Richard Fisher sallied forth there was the potential for embarrassing spectacle, as when he held a press conference to condemn wages rising faster than prices. Or to warn that rising prices of antiquarian collectible books harbingered an inflation that merited a tighter monetary noose immediately. But, in general, does Fed monetary policy exhibit class bias? Perhaps So Think… Read More

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During the month of January, we heard the word “recession” quite a bit. Just google “US recession in 2016” for a sample. Maybe the Fed´s blunder in raising the Fed Funds rate in December 2016 was the “sentiment trigger”. As Narayana Kocherlakota said recently: The FOMC’s current policy framework goes back to at least mid-2013. It can be defined by two key words gradual and normalization. Both words refer to the level of monetary accommodation. In terms of the target range for the fed funds rate, the word “gradual” is generally interpreted by those who watch the Fed closely to… Read More

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Marcus Nunes/Jan 29, 2016 That´s what you get when you do GDP component analysis. Sounds smart but is utterly useless: Macroeconomics should be about aggregates, not components of spending. Yes, changes occurring in the various components of GDP can impact interest rates, and thus velocity. And if monetary policy is inept (i.e. doesn’t offset changes in velocity) that can impact nominal spending, but it certainly isn’t the most illuminating way of looking at the issue. It’s like trying to explain changes in the overall price level by modelling changes in the nominal price of each good—theoretically possible, but a waste… Read More

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James Alexander/Jan 28, 2016 According to the UK Office for National Statistics (ONS) the reason for the heavy downward revisions to UK NGDP are due to heavy downward revisions to the implied GDP Deflator. The deflator is “inflation” as measured for national income statistics. It broadly follows the unreliable, because never revised, UK CPI figures that the BoE tries to manage. The deflator is unreliable too, but at least mistakes are corrected! This time, to be fair, it looks as though the GDP Deflator has been revised down, bringing it into line with the collapsing CPI. Which is “right”, who… Read More

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Marcus Nunes/Jan 27, 2016 To them, inflation, or its absence, is purely a cost phenomenon, pushed up or down by oil prices and/or the dollar and unemployment! Worse, they insist on reasoning from a price change! From the statement: Inflation is expected to remain low in the near term, in part because of the further declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. That “sing-a-long” has been going on for such a long time that “medium-term”… Read More

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