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2018-10-05Macro `n Cheese


After being on the move for a long time, not to mention jet-lagged, Roger was all Powell-ed up after attending a talk by the FED-chair.


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I have spent the past few days at the 60th annual meeting of the National Association for Business Economics (NABE). And while there where many interesting seminars and meetings, listening to FED chairman Jerome Powell was enlightening. It was clear that, by and large, he agrees with the current market mantra that the FED can keep on hiking for as long as the economy looks sturdy enough. He also agrees that the balance sheet policy is currently not an issue, but they will return to it during the course of 2019 (towards summer). He also agrees that while developments abroad in general, and in EMEs in particular, are worrisome, for the time being they constitute no reason for the FED to stop hiking.

What Powell offered was instead a list of focal points. Utilizing the simplest of Phillips curve frameworks, Powell touted the widely held opinion that the inflation targeting regime had made both slack and persistence less prominent:


And Powell interprets this, in particular the lower persistence, as a sign that the formation of inflation expectations has become more forward looking. Here, Powell and the FED, look at a host of inflation expectations measures:


That said, given the progress in normalization of the economy, Powell is clearly wanting to retract some of that pervasive “forward guidance” and make financial markets “think for themselves” again. Given the apparent changes to the Phillips curve, the FED is set (like the rest of us) to look at incoming information. And given the very strong labor markets, with growth in wages and incomes showing signs of life, a few candidates stand out as particularly important:


In addition, the unemployment rate is, per se, an important indicator of possibly rising upstream cost pressures but here we rely on both anecdotal and qualitative data such as NFIB, Beige book, etc.
Under any circumstances, to make Powell’s message abundantly clear, I think he should have put it bluntly: We – the FED – will hike until something breaks.

Ha! Little wonder then that it is the FED who has killed off more expansions than anyone or anything else.



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