Monday, October 23, 2017

In Defense of the Conventional Wisdom

Tim Duy:

In Defense of the Conventional Wisdom: Let’s revisit this from San Francisco Federal Reserve Resident John Williams:
If you look until 2015 or so, the inflation data basically followed our models, emphasizing the role of weakness in the economy. Where this mystery has happened is really in the last year or two. I view both inflation picking up faster than expected in early 2017 and now the pullback as just part of the variability that’s going to happen. I don’t see any signs that somehow the inflation process is fundamentally changed.
I’ve been doing this a long time, and the Phillips curve has been declared dead far more times than Mark Twain.
This is representative of the conventional wisdom at the Fed, summed up succinctly as adherence to a basic expectations-augmented Phillips curve as a primary policy guide. As unemployment falls toward and below full employment, capacity constraints in the economy tighten and eventually create inflationary pressures. The central bank needs to offset these pressures via tighter policy to contain inflation and maintain inflation expectations, the center of gravity for actual inflation over time. ...Continued here...

    Posted by on Monday, October 23, 2017 at 09:39 AM in Economics, Monetary Policy | Permalink  Comments (33) 


    Sunday, October 22, 2017

    Links for 10-22-17

      Posted by on Sunday, October 22, 2017 at 11:37 PM in Economics, Links | Permalink  Comments (164) 


      Friday, October 20, 2017

      Paul Krugman: Trump, Trade and Tantrums

      "Breaking up or degrading Nafta would have the same disruptive effects that came from Nafta’s creation":

      Trump, Trade and Tantrums, by Paul Krugman, NY Times: Everyone here wants to know what’s going to happen to Nafta — the North American Free Trade Agreement... Donald Trump has described Nafta as the “worst trade deal ever made.” But will he actually destroy it?
      Until just a few days ago I was pretty sure that he wouldn’t. My guess was that he would negotiate some minor changes to the agreement, declare victory and move on. Markets seemed to agree...
      But I’ve been revising that view in light of recent events — especially Trump’s health care temper tantrum. Breaking up Nafta would be terrible for Mexico and bad for the U.S. ... But it might be good for Trump’s fragile ego. And that’s a reason to fear the worst. ...
      We now live in a North American economy built around the reality of free trade. In particular, U.S., Canadian and Mexican manufacturing are deeply enmeshed with one another. Many industrial plants were built precisely to take advantage of our economic integration, buying from or selling to other industrial plants across the borders.
      As a result, breaking up or degrading Nafta would have the same disruptive effects that came from Nafta’s creation: Plants would close, jobs would disappear, communities would lose their livelihoods. And, yes, many businesses, small, large and in some cases huge, would lose many billions of dollars.
      Oh, and it’s not just manufacturing. What do you think would happen to the farmers of Iowa if they lost one of the most important markets for their corn? ...
      Most important, look at what Trump has been doing with his open, indeed gleeful sabotage of the U.S. health care system. Never mind the huge human costs he’s imposing; he isn’t even following any plausible political strategy, since he and his party are likely, with good reason, to be blamed for the damage. Furthermore, his actions will cost big businesses — insurers and health providers — billions; he’s even boasting about how much he has hurt their stock prices.
      So we’ve now seen Trump deliberately hurt millions of people and inflict billions of losses on a major industry out of sheer spite. If he’s willing to do that on health care, why assume he won’t do the same thing on international trade policy?
      Nafta, then, is at real risk. And if it does get destroyed, the only question is whether the consequences will be ugly, or extremely ugly.

        Posted by on Friday, October 20, 2017 at 07:37 AM in Economics, International Trade, Politics | Permalink  Comments (215) 


        Thursday, October 19, 2017

        Incoming Data Supportive of December Rate Hike

        Tim Duy:

        Incoming Data Supportive of December Rate Hike: If we ignore inflation, then nothing is really standing in the way of a rate hike in December. Of course, given that arguably the primary job of a central bank is to meet its definition of price stability, the Fed shouldn’t really ignore inflation. Policymakers, however, would counter that they are not ignoring inflation. They are simply favoring the inflation forecast over actual inflation. And they would further argue they have good cause – with the economy chugging along, it is only a matter of time before resource constraints become evident and price pressures rise. That’s their story, and they are sticking to it. ...Continued here...

          Posted by on Thursday, October 19, 2017 at 01:41 PM in Economics, Monetary Policy | Permalink  Comments (48) 


          Links for 10-19-17

            Posted by on Thursday, October 19, 2017 at 01:14 PM in Economics, Links | Permalink  Comments (180) 


            Wednesday, October 18, 2017

            Monetary Policy in a New Era (Video) - Ben Bernanke

              Posted by on Wednesday, October 18, 2017 at 09:45 AM in Conferences, Economics, Macroeconomics, Monetary Policy, Video | Permalink  Comments (30) 


              Links for 10-18-17

                Posted by on Wednesday, October 18, 2017 at 09:41 AM in Economics, Links | Permalink  Comments (142) 


                Tuesday, October 17, 2017

                Rethinking Macroeconomic Policy Conference (Video): Blanchard and Summers

                  Posted by on Tuesday, October 17, 2017 at 10:07 AM in Economics, Macroeconomics, Video | Permalink  Comments (8) 


                  Monday, October 16, 2017

                  Paul Krugman: The G.O.P. Is No Party for Honest Men

                  "A strategy based entirely on lies":

                  The G.O.P. Is No Party for Honest Men, by Paul Krugman, NY Times: According to a new CBS News poll, almost 60 percent of the American public believes that the current Republican tax plan favors the wealthy. Some people see this number as a sign that the plan is in trouble; I see it as a sign that Republican lies are working far better than they deserve to.
                  For the plan does indeed favor the wealthy — overwhelmingly.... It’s shocking that as many as 40 percent of Americans don’t realize this. ...
                  So the question about this plan isn’t whether it favors the wealthy — it does, to an outrageous extent. The questions we should be asking instead are why Republicans are pushing this so hard, and how they can hope to get away with it. ...
                  So what’s behind this priority? Follow the money. Big donors are furious at missing out on the $700 billion in tax cuts that were supposed to come out of Obamacare repeal. If they don’t get big bucks out of tax “reform,” they might close their pocketbooks for the 2018 midterm elections.
                  Beyond that, modern conservatism is a sort of ecosystem of media outlets, think tanks, lobbying outfits and more that offers many lucrative niches — so-called wingnut welfare — for the ideologically reliable. And that means being reliable to the interests of the wealthy.
                  But how can an administration that pretends to be populist, to stand up for ordinary (white) working people, sell such elitist policies?
                  The answer is a strategy based entirely on lies. ...
                  Nor do I mean that there are just one or two big lies. There are many — so many I literally don’t have space to ... list them... In a long blog post ... I came up with 10 major Republican lies about tax cuts, and I’m sure I missed a few.
                  So, politically, can they really get away with this? A lot depends on how the news media handles it. ...
                  One thing we know for sure, however, is that a great majority of Republican politicians know perfectly well that their party is lying about its tax plan — and every even halfway competent economist aligned with the party definitely understands what’s going on.
                  What this means is that everyone who goes along with this plan, or even remains silent in the face of the campaign of mass dissimulation, is complicit — is in effect an accomplice to the most dishonest political selling job in American history.

                    Posted by on Monday, October 16, 2017 at 06:24 PM in Economics, Politics, Taxes | Permalink  Comments (79) 


                    Is The Fed Setting Itself Up To Fail In The Next Recession?

                    Tim Duy:

                     

                    Is The Fed Setting Itself Up To Fail In The Next Recession?: The Federal Reserve remains committed to a December rate hike, persistent low inflation not withstanding. With unemployment below Fed estimates of its longer-run natural rate, most FOMC participants do not need evidence of stronger inflation to justify further rate hikes. Ongoing solid job growth will be sufficient cause for tighter policy, especially in what they perceive to be an environment of loosening financial conditions. The main risk from this scenario is that the US economy enters the next recession with diminished inflation expectations, which could further hobble central bankers already facing the prospect of returning to the effective lower bound in the next cycle. ...Continued here as a newsletter...

                     

                      Posted by on Monday, October 16, 2017 at 06:02 PM in Economics, Monetary Policy | Permalink  Comments (128) 


                      Links for 10-16-17

                        Posted by on Monday, October 16, 2017 at 06:02 PM in Economics, Links | Permalink  Comments (129) 


                        Friday, October 13, 2017

                        Paul Krugman: Let Them Eat Paper Towels

                        "The betrayal and abandonment of three and a half million of our own people":

                        Let Them Eat Paper Towels, by Paul Krugman, NY Times: The situation in Iowa remains horrifying. More than a third of the population has been without clean water for three weeks, and waterborne diseases appear to be spreading. Only a sixth of the population has electricity..., health care system is a shambles, and sheer hunger may be a problem in some remote areas.
                        Fortunately, the federal government is going all out to aid its citizens in distress..., while praising the often heroic efforts of Iowa residents to help themselves. And generous aid, he promises, will continue as long as it’s needed.
                        O.K., I lied. The dire situation I just described is in Puerto Rico, not Iowa (which happens to have just about the same number of U.S. citizens). And my upbeat portrayal of the federal response ... is the opposite of the truth. What we’re actually witnessing, in effect, is the betrayal and abandonment of three and a half million of our own people. ...
                        From the beginning, Donald Trump — who literally seems to think that he deserves praise for throwing a few rolls of paper towels into a crowd — has suggested that Puerto Rico is responsible for its own disaster, and he has systematically denigrated the efforts of its people to take care of one another. ...
                        Meanwhile, it took almost three weeks ... before Trump asked Congress to provide financial aid — and his request was for loans, not grants, which is mind-boggling when you bear in mind that the territory is effectively bankrupt.
                        And then came Thursday morning... Trump ... appeared to threaten to cut off aid from the Federal Emergency Management Agency and the military. ...
                        The simple fact is that millions of our fellow citizens are facing catastrophe. How can we be abandoning them...?
                        Much of the answer, no doubt, is ... race. Puerto Ricans would doubtless be getting better treatment if they were all of, say, Norwegian descent.
                        But let’s be fair: Trump is also working ... to destroy health care for millions of other Americans, many of them working-class non-Hispanic whites — the very people who voted for him... I wouldn’t go so far as to call him an equal-opportunity monster — he clearly has a special animus toward minorities — but his self-centeredness and complete lack of empathy extend quite widely.
                        Whatever the precise mix of motives, what’s happening in Puerto Rico is utterly shameful. And everyone who enables the regime perpetuating this shame shares part of the guilt.

                          Posted by on Friday, October 13, 2017 at 11:24 AM in Economics, Politics | Permalink  Comments (93) 


                          Links for 10-13-17

                            Posted by on Friday, October 13, 2017 at 10:51 AM in Economics, Links | Permalink  Comments (213) 


                            Thursday, October 12, 2017

                            Rethinking Macroeconomic Policy

                            There is a conference on Rethinking Macroeconomic Policy "coordinated by Olivier Blanchard ...and Lawrence H. Summers..." taking place today and tomorrow (wanted to go, but couldn't).

                            "Academic experts and policymakers will address the challenges to macroeconomic thinking and policymaking that today’s economic environment presents–low inflation despite low unemployment, the apparent interactions of rising inequality and stagnating productivity, and the unresponsiveness of long-term interest rates to rising public debt, among others." [Conference program, papers, presentations, and conference webcast.]

                            Here are links to the first two papers presented at the conference. First, Olivier Blanchard and Lawrence Summers:

                            Rethinking Stabilization Policy. Back to the Future (Preliminary): Nearly ten years after the onset of the Great Financial Crisis, both researchers and policy makers are still assessing the policy implications of the crisis and its aftermath. Previous major crises, from the Great Depression to the stagflation of the 1970s, profoundly changed both macroeconomics and macroeconomic policy. The question is whether this crisis should and will have similar effects.
                            We believe it should, although we are less sure it will. Rather obviously, the crisis has forced macroeconomists to (re)discover the role and the complexity of the financial sector, and the danger of financial crises. But the lessons should go largely beyond this, and force us to question a number of cherished beliefs. Among other things, the events of the last ten years have put into question the presumption that economies are self stabilizing, have raised again the issue of whether temporary shocks can have permanent effects, and have shown the importance of non linearities.
                            These call for a major reappraisal of macroeconomic thinking and macroeconomic policy. As the paper is a curtain raiser for a conference that will look in more detail at the implications for specific policies, we make no attempt at being encyclopedic and feel free to pick and choose the issues which we see as most salient. ...

                            Ben Bernanke posted a summary of his paper on his blog at Brookings:

                            Temporary price-level targeting: An alternative framework for monetary policy: Low nominal interest rates, low inflation, and slow economic growth pose challenges to central bankers. In particular, with estimates of the long-run equilibrium level of the real interest rate quite low, the next recession may occur at a time when the Fed has little room to cut short-term rates. As I have written previously and recent research has explored, problems associated with the zero-lower bound (ZLB) on interest rates could be severe and enduring. While the Fed has other useful policies in its toolkit such as quantitative easing and forward guidance, I am not confident that the current monetary toolbox would prove sufficient to address a sharp downturn. I am therefore sympathetic to the view of San Francisco Fed President John Williams and others that we should be thinking now about adjusting the framework in which monetary policy is conducted, to provide more policy “space” in the future. In a paper presented at the Peterson Institute for International Economics, I propose an option for an alternative monetary framework that I call a temporary price-level target—temporary, because it would apply only at times when short-term interest rates are at or very near zero.
                            To explain my proposal, I’ll begin by briefly discussing two other ideas for changing the monetary framework:  raising the Fed’s inflation target above the current 2 percent level, and instituting a price-level target that would operate at all times.  (See my paper for more details.) ...

                              Posted by on Thursday, October 12, 2017 at 11:19 AM in Academic Papers, Economics, Macroeconomics | Permalink  Comments (120) 


                              Wednesday, October 11, 2017

                              Links for 10-11-17

                                Posted by on Wednesday, October 11, 2017 at 10:07 AM in Economics, Links | Permalink  Comments (157) 


                                Tuesday, October 10, 2017

                                Fed Watch: Kevin Warsh, Very Serious Person

                                Tim Duy:

                                Kevin Warsh, Very Serious Person, by Tim Duy: Scott Sumner is perplexed by Fed chair candidate Kevin Warsh. He reads the 2010 FOMC transcripts and finds Warsh explaining:
                                First, my views on policy. As I said when we met by videoconference, my views are increasingly out of step with the views of most people around this table. The path that you’re leading us to, Mr. Chairman, is not my preferred path forward. I think we are removing much of the burden from those that could actually help reach these objectives, particular the growth and employment objectives, and we are putting that onus strangely on ourselves rather than letting it rest where it should lie. We are too accepting of dangerous policies from others that have been long in the making, and we should put the burden on them.
                                I can think, Mr. Chairman, of a tough weekend that the Europeans had, particularly your counterpart at the ECB, in the spring or summer, when we all knew that the European Central Bank, rightly or wrongly, was going to take action. But Jean-Claude Trichet did not take action until very late that Sunday night, until the fiscal authorities did their part. He thought that if on Friday night he were to say all of the things he’d be willing to do, he’d be taking the burden off the fiscal authorities. He chose to wait. I think we would be far better off waiting. If we proceed on this path, as I suspect we will, I would still encourage you to put the burden where it rightly belongs, which is on other policymakers here in Washington, and to do so in a way that is respectful of different lines of responsibility.
                                Sumner is understandably scratching his head, trying to figure out what Warsh is getting at:
                                His reasoning process is poor and he lacks good communication skills.  He has very poor judgment when interpreting data.  I really don’t know what he’s trying to say here, but the reference to Trichet is interesting.  Trichet was trying to encourage fiscal authorities to adopt more contractionary fiscal policies, not expansionary policies.  Trichet did not want to “bail out” expansionary policies with ultra-low interest rates, and Warsh seems to be endorsing Trichet’s approach.  And given Warsh’s reputation as a conservative, and the massive deficits being run by Obama back in 2010, I find it odd that Warsh would be advocating fiscal stimulus, as Brannon suggests.  But again, the passage is so garbled that I could easily be wrong.
                                I don’t think Warsh was advocating for more fiscal stimulus at this meeting. Warsh is a Very Serious Person, and all Very Serious People know that deficits are bad. I believe that Warsh was at this juncture advocating a Trichet-style approach to the crisis, using the independence of the central bank to force the fiscal authorities to rein in those bad deficits, because of course everything wrong in the economy can be tied back to deficit spending. All Very Serious People know this. Of course, Trichet’s approach proved to be disastrous, which is why Sumner is rightfully puzzled when hearing a Fed governor suggest the same.
                                Sadly, Warsh was not the only Fed official who advocated such an approach. Warsh is apparently cut from the same cloth as the person I believe was the worst regional bank president in recent memory. Recall when the FOMC statement contained this sort of reference:
                                Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth.
                                Of course, if you bothered to know what the FOMC was saying, you knew the complaint was that they believed monetary policy had reached its limits to stimulate the economy, and that faster growth required a more stimulative monetary policy.
                                Then Dallas Federal Reserve President Richard Fisher either didn’t understand what the FOMC said, or deliberately misinterpreted the FOMC. In a 2013 speech, Fisher says:
                                Even if we at the Dallas Fed are right and the overall outlook for the economy is better than the current dashboard or the conventional prognostications of economists, there exists a formidable brake on growth. It was referred to point-blank in the last statement issued by the FOMC: “…fiscal policy is restraining economic growth.”
                                Fiscal policy is inhibiting the transmission of monetary policy into robust job creation…
                                …The propensity of members of Congress has been to spend in excess of revenues to give pleasure to their constituents and garner their affection…Until the Congress and the president provide a clear road map as to how fiscal rectitude will be implemented, this lack of credible details for limiting the debt-to-GDP ratio and reengineering fiscal policy to stimulate rather than constrain growth is creating undue uncertainty about future tax rates, future government purchases, future retiree benefits and all manner of factors that impact employment and economic growth. Meanwhile, the divisive nature and petty posturing of those who must determine the fiscal path of the nation is further undermining confidence and limiting the effectiveness of monetary policy…
                                …I argue that the Fed has no hope of moving the economy to full employment unless our fiscal authorities get their act together…Until then, I argue that the Fed is, at best, pushing on a string and, at worst, building up kindling for a massive shipboard fire of eventual inflation.
                                These aren’t the kind of people you want in charge of monetary policy. We need policymakers that understand their role is not to withhold monetary stimulus to force fiscal authorities to pursue countercyclical policy simply because Very Serious People know that deficit spending is always bad and cutting deficits is the solution to every problem. Monetary policy is about independently assessing the economy and enacting the policy necessary to maintain full employment and price stability. And oftentimes that means taking fiscal policy as an exogenous factor.
                                What is particularly discouraging is that neither Warsh nor Fisher appears to understand that during a recession, at a minimum automatic stabilizers themselves will swell the deficit. Taking aim at the deficit in such times is naive at best, deliberately spiteful at worst.
                                My concern remains that a Fed with someone like Kevin Warsh at the helm would prove to be disastrous for Wall Street and Main Street alike when the next recession hits. Neither group needs a central banker that believes a recession is an opportunity to inflict more pain.

                                  Posted by on Tuesday, October 10, 2017 at 06:16 PM in Economics, Fed Watch, Fiscal Policy, Monetary Policy | Permalink  Comments (23) 


                                  Links for 10-10-17

                                    Posted by on Tuesday, October 10, 2017 at 10:31 AM in Economics, Links | Permalink  Comments (66) 


                                    Paul Krugman: Virginia Is for Haters

                                    "Virginia is now the most important place on the U.S. political landscape":

                                    Virginia Is for Haters, by Paul Krugman, NY Times: ...If you want to understand why policies toward the poor are so different at the state level..., one predictor stands out: the African-American share of the population. The more blacks, the less compassion white voters feel.
                                    The story gets even clearer if you look at the implementation of the Affordable Care Act, which allows states to expand Medicaid coverage at federal expense...
                                    Which brings me to Virginia, which is holding crucial state elections in just four weeks. ... The state is becoming more ethnically diverse..., it supported the Democratic presidential candidate in the last three elections.
                                    But is Virginia’s apparent moral progress an illusion? And if it is, what does that say about America as a whole?
                                    Virginia was, of course, the site of the infamous Charlottesville march by torch-carrying white supremacists — “very fine people,” according to Donald Trump — that ended with the death of a counterprotester. More important, perhaps, is ... that despite its growing political moderation and its Democratic governor, Virginia is among the states still refusing to expand Medicaid, even though that refusal means gratuitous financial hardship for many and a significant number of people dying from lack of medical care.
                                    How is this possible? Democratic-leaning voters are much less likely than Republican-leaning voters to cast ballots in state and local elections; as a result, a politically moderate state has a hard-right legislature. And there’s a real possibility that it may soon have a Republican governor, too.
                                    ...Ed Gillespie, the G.O.P. candidate, is trying to pull off an upset by going full-on Trumpist, doing all he can — with assistance from the tweeter in chief — to mobilize the white nationalist vote. ...
                                    Whatever happens..., the consequences will be huge. If Gillespie pulls this off, all the worst impulses of the Trumpist G.O.P. will be empowered; you might think that things can’t get even worse, but yes, they can.
                                    If ... Northam wins and Democrats make big inroads in the state legislature, it won’t just probably mean that hundreds of thousands of Virginians will get health insurance, and it won’t just be an omen for the 2018 midterms. It will also encourage at least some sane Republicans to break with a man they privately fear and despise (see Corker, Bob). ...
                                    Folks, right now ... Virginia is now the most important place on the U.S. political landscape — and what happens there could decide the fate of the nation.

                                      Posted by on Tuesday, October 10, 2017 at 10:31 AM in Economics, Politics | Permalink  Comments (14) 


                                      Suppression of the Wealth Tax: An Historical Error

                                      Thomas Piketty:

                                      Suppression of the wealth tax: an historical error, by Thomas Piketty: Let it be said at once: the suppression of the wealth tax (Impôt sur la Fortune or ISF) constitutes a serious moral, economic and historical mistake. This decision reveals a profound misunderstanding of the challenges to inequality posed by globalization.
                                      Let’s go back for a moment. During the first globalization period between 1870 and 1914, a strong international movement gradually took shape which sought to promote a new type of redistribution and taxation. Based on a progressive taxation system on income, wealth and inheritance, this new model was aimed at a better distribution of productivity gains and the structural reduction of the concentration of property and economic power. It was successfully implemented in the period 1920 to 1970, partly as a result of the pressure of dramatic historical events, but equally thanks to a lengthy intellectual and political process.
                                      We may perhaps today be witnessing the premises of a similar movement. Confronted with the rise in inequality, awareness is gaining momentum. ...

                                        Posted by on Tuesday, October 10, 2017 at 10:30 AM in Economics, Income Distribution, Taxes | Permalink  Comments (5) 


                                        Monday, October 09, 2017

                                        Links for 10-09-17

                                          Posted by on Monday, October 9, 2017 at 10:25 AM in Economics, Links | Permalink  Comments (113) 


                                          Fed Watch: On Track For a December Rate Hike

                                          Tim Duy:

                                          On Track For a December Rate Hike, by Tim Duy: The headline figure on nonfarm payrolls report came in well below already withered expectations, but the disappointment was more than compensated for in the details of both the establishment and household survey. The Fed is looking for data that allows them to overlook the weak inflation data. This was just that sort of data

                                          Continued as a PDF newsletter here or blog below... 

                                          Nonfarm payrolls sank by 33k, and prior months were revised down. The three-month average is just 91k, which would put the job growth in-line with the range Fed officials believe is consistent with a steady unemployment rate.
                                          But there was little doubt that Hurricanes Harvey and Irma distorted the data, with a particularly large impact on leisure and hospitality numbers. That sector lost 111k employees during the month and looks to have borne the brunt of the impact.

                                          NFPTOTAL

                                          Interestingly, non-farm payrolls excluding leisure and hospitality remain in the range of recent trends. Like overall nonfarm payrolls, the pace of growth entered a gradual slowing phase in 2015. This behavior looks consistent with what would be expected as the economy approach full employment and labor becomes more difficult to find.  

                                          NFPEXLH

                                          Speaking of full employment, the unemployment rate fell to 4.2%. Recall that in the Fed’s latest Summary of Economic Projections, policymakers projected the unemployment rate to fall to 4.3% by the end of the year. We are a little ahead of schedule, it seems. Note that according to the Bureau of Labor Statistics, the hurricanes did not impact the estimate of the unemployment rate.

                                            UNEMP

                                          The decline of the unemployment rate should not be a surprise. Job growth continues to track above labor force growth, a situation that typically results in a falling unemployment rate. Moreover, the Fed’s unemployment forecast always seemed suspect. The forecast GDP growth rate through 2019 exceeds potential GDP growth; this would on average suspect greater downward pressure on unemployment than implied by the Fed’s forecast.
                                          An unemployment rate at 4.2% will rattle Fed officials already worried about pushing too far below full employment under the current projections. This will go a long way toward offsetting their nagging worries about low inflation. 
                                          The pace of wage gains accelerated sharply in September. Composition effects due to the loss of lower paid leisure and hospitality jobs might account for part of the gains. But take note of two points. First, hourly wages have generally seen upward revisions in recent months (the September vintage overlaps the August vintage, so I excluded the latter). Second, wage gains in the third quarter look more consistent and broad-based than the rest of the year. 

                                          WAGES

                                          WAGES

                                          WAGES

                                          Hence, we should not discount the possibility that in these wage numbers we see the lagged impact of unemployment running below its longer run rate. Certainly, we need more data to be certain. It would be unwise to read too much into what we know is a hurricane-muddled report. But Fed officials will tend toward this interpretation.
                                          Finally, note that temporary help payrolls continue to climb, suggesting that while employment growth might be softening as the expansion matures, but the economy remains in the expansion and is not poised to turn toward recession. 

                                          TEMP

                                          Atlanta Federal Reserve President Raphael Bostic offered an assessment of the labor report that I think will be largely shared by his colleagues. Via Bloomberg:
                                          “We knew the hurricanes were really going to give a hit to some of these top line numbers,’’ Bostic said after a speech in Austin, Texas. “The numbers underneath are actually quite interesting. They suggest some of the strength we were starting to see at the beginning of August, the storms didn’t completely wash them out.”
                                          Bostic looks ready to support a December rate hike, assuming the economy continues to post solid numbers. He also downplayed inflation concerns:
                                          “We have seen a slight decline, I think, but nothing that would suggest there has been something fundamental that has changed in how consumers are viewing the marketplace,’’ he said.
                                          Inflation continues to rattle Dallas Federal Reserve President Robert Kaplan. Via Reuters:
                                          “I would like to see more evidence of progress in reaching our inflation objective,” he said, reiterating his concern that globalization and technology are keeping inflation muted, despite unemployment that sank in September to 4.2 percent.
                                          Kaplan votes this year. Although he is among the group concerned about low inflation, he will likely not dissent against a December rate hike if the remainder of the data, on average, sustains a rosy outlook.
                                          St. Louis Federal Reserve President James Bullard stuck to his desire to hold rates steady, worried that the Fed risks pushing inflation expectations lower with additional rate hikes. He wants more proof that inflation is heading higher before the Fed acts. Via Reuters:
                                          “The December meeting is going to be too early to make a determination on whether inflation is coming back. I don’t see how we can get the data on that. I am getting more concerned that we might make a policy mistake.”
                                          The data calendar is a bit slower this week. Look for the JOLTS report (Wednesday), inflation indicator reports PPI (Thursday) and CPI (Friday), and readings on the demand side of the economy from retail sales and business inventories (both on Friday). 
                                          In addition, we have plenty of Fed speakers, including regional Presidents Kashkari (Tuesday), Evans (Wednesday), Bostic (Thursday), and Rosengren and Kaplan (Friday). I don’t think we will see anything new from these speakers regarding monetary policy. Federal Reserve Governor Jerome Powell speaks Thursday (keynote address on emerging markets) and Friday (“Are Rules Made to be Broken? Discretion and Monetary Policy,” an event for which I foolishly forgot to make an effort to attend). Neither speech will likely give direct policy guidance, but with Powell rumored to be a contender for the top spot at the Fed, they will offer additional opportunity to explore his thinking. 
                                          Bottom Line: December rate hike still a go; low unemployment outweighs low inflation for now. That will change next year if job growth slows further and unemployment stabilizes.

                                            Posted by on Monday, October 9, 2017 at 10:24 AM Permalink  Comments (3)