Tag: Federal Reserve

Sources of Fluctuations in Short-Term Yields and Recession Probabilities

Mary Pat Campbell

Link: https://www.chicagofed.org/publications/chicago-fed-letter/2022/469

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Excerpt:

We simulate future realizations of the policy gap and the slope of inflation forecasts from the 2022:Q2 initial conditions through 2023:Q4 using the ABC model. We then evaluate the recession probability predicted by our preferred probit model for each of these simulated paths. Through this analysis, we show that future inflation outcomes and the odds of a recession depend critically on both the pace of removal of monetary policy accommodation and on how restrictive the monetary policy stance will become over the medium term. In particular, we highlight two scenarios: The first one, which we refer to as the “baseline case,” reflects the ABC model forecasts or, equivalently, the average of all simulated paths. The second one, which we label the “tighter-policy scenario,” is characterized by a faster removal of monetary policy accommodation; it is identified by the average of the simulated paths in which policy becomes restrictive by the end of 2022.11

1. Baseline case: As of early June 2022, the ABC model predicts that nominal and real yields will rise over the next six quarters, the current policy gap will narrow and become mildly restrictive in mid-2023, while core inflation will fall and remain around one percentage point above its model-implied longer-run expectations through 2023 (figure 2, blue lines in panels A and B). The expected tightening of the policy gap and a downward-sloping expected inflation path combine to increase the one-year-ahead recession probability to about 35% by 2023 (figure 2, blue line panel C). Such a level is comparable to the one estimated ahead of the 1994 monetary policy tightening cycle that was followed by a soft-landing scenario.

2. Tighter-policy scenario: In this alternative scenario, monetary policy becomes more restrictive than in the baseline case, in that the policy gap is markedly restrictive over 2023. In this case we find that core inflation declines more rapidly than under the baseline, closing the gap with its model-implied longer-run expectations almost completely by the end of 2023. By that date, in this scenario the likelihood of a recession approaches 60%, a level that, based on our historical estimates, is generally followed by a recession in our sample (figure 2, red lines).

Author(s): Andrea Ajello , Luca Benzoni , Makena Schwinn , Yannick Timmer , Francisco Vazquez-Grande

Publication Date: August 2022

Publication Site: Federal Reserve Bank of Chicago

Fed Rate Hike Odds Jump to Full Point After the Hot CPI Report

Mary Pat Campbell

Link: https://mishtalk.com/economics/fed-rate-hike-odds-jump-to-full-point-after-the-hot-cpi-report

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Yesterday, the market penciled in a three-quarter point hike. Today, the market expectation is for a full point hike.

The WSJ notes that would be the largest hike since the Fed started directly using overnight interest rates to conduct monetary policy in the early 1990s.

Author(s): Mike Shedlock

Publication Date: 13 July 2022

Publication Site: Mish Talk

The Asininity of Inflation Expectations, Once Again By Powell and the Fed

Mary Pat Campbell

Link: https://mishtalk.com/economics/the-asininity-of-inflation-expectations-once-again-by-powell-and-the-fed

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Common sense and practical examples suggest that inflation expectations theory is ass backward.

So much of the CPI is nondiscretionary that it’s difficult to impossible for CPI expectations to matter. 

Yet, economists focus on expectations that don’t matter and ignore the expectations that do matter, namely asset prices!

I have written about this several times previously, two of them before I even found the Fed study supporting my view. 

…..

A BIS study concluded “Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive.“

Indeed, that must be the case as more goods for less money by default improves standards of living.

The Fed was hell bent on reducing standards of living via inflation. Now they struggle to undo the inflation and asset bubble consequences they created. 

The Fed is the problem, not the solution.

Author(s): Mike Shedlock

Publication Date: 25 Jun 2022

Publication Site: Mish Talk

Visualizing the Three Different Types of Inflation

Mary Pat Campbell

Link: https://advisor.visualcapitalist.com/three-different-types-of-inflation/

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Monetary inflation occurs when the U.S. money supply increases over time. This represents both physical and digital money circulating in the economy including cash, checking accounts, and money market mutual funds.

The U.S. central bank typically influences the money supply by printing money, buying bonds, or changing bank reserve requirements. The central bank controls the money supply in order to boost the economy or tame inflation and keep prices stable.

Between 2020-2021, the money supply increased roughly 25%—a historic record—in response to the COVID-19 crisis. Since then, the Federal Reserve began tapering its bond purchases as the economy showed signs of strength.

Author(s): Dorothy Neufeld

Publication Date: 16 Jun 2022

Publication Site: Visual Capitalist

By Design, the Fed May Be Tightening Too Much

Mary Pat Campbell

Link: https://www.wsj.com/amp/articles/by-design-the-fed-may-be-tightening-too-much-11655370001

Excerpt:

The Fed has often moved interest rates by 0.75 percentage point or more in recent decades. But until this week, it had always done so in a downward direction. Indeed, it was a hallmark of Fed policy that it always cut interest rates faster, with less prompting, than it raised them.

…..

This asymmetry reflected the Fed’s perception of risks. If it cut rates too little, the economy might spiral down and the financial system implode. If it cut them too much, inflation might, some years later, rise. Throughout this prepandemic period, inflation was low and, at times, too low, but that wasn’t a big deal. Moreover, during that low-inflation, low-interest-rate era, rates couldn’t fall very much — the Fed called this the “zero lower bound” — so best to act quickly to forestall a downward spiral. If inflation was a problem, there was no limit to how high rates could go.

This philosophy got taken too far. The Fed kept rates too low for too long last year (and the Biden administration enacted too much fiscal stimulus) out of a mistaken belief that inflation was a remote threat compared with prolonged high unemployment.

The result is that risks are now asymmetric in the other direction. Inflation is too high and a self-sustaining wage-price spiral is a real threat. Asked why, after carefully laying the groundwork for a half-point increase, the Fed raised rates by 0.75 point Wednesday, Mr. Powell pointed to an “eye-catching” report that showed long-term inflation expectations rising ominously.

Author(s): Greg Ip

Publication Date: 16 Jun 2022

Publication Site: WSJ

Fed Hikes Rates 75 Basis Points; Powell Says 75 or 50 Likely in July

Mary Pat Campbell

Link: https://www.thinkadvisor.com/2022/06/15/fed-hikes-rates-75-bps-intensifying-inflation-fight/

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The Federal Reserve raised interest rates by 75 basis points — the biggest increase since 1994 — and Chair Jerome Powell said officials could move by that much again next month or make a smaller half-point increase to get inflation under control.

Slammed by critics for not anticipating the fastest price gains in four decades and then for being too slow to respond to them, Chairman Jerome Powell and colleagues on Wednesday intensified their effort to cool prices by lifting the target range for the federal funds rate to 1.5% to 1.75%.

“I do not expect moves of this size to be common,” he said at a press conference in Washington after the decision, referring to the larger increase. “Either a 50 basis point or a 75 basis-point increase seems most likely at our next meeting. We will, however, make our decisions meeting by meeting.”

Author(s): Craig Torres

Publication Date: 15 June 2022

Publication Site: Think Advisor

Munis sit on sidelines while USTs rally post-Fed rate hike

Mary Pat Campbell

Link: https://fixedincome.fidelity.com/ftgw/fi/FINewsArticle?id=202206151637SM______BNDBUYER_00000181-67cc-d98e-a5fb-efcf1bfc0001_110.1

Excerpt:

Municipals took a backseat as the Federal Open Market Committee announced its decision to implement a three-quarter point rate hike while U.S. Treasuries rallied into late afternoon following the news. Equities rallied.

The move, prompted partly by hotter-than-expected inflation data Friday, is the largest rate hike since 1994.

?Investors appear encouraged that the FOMC is willing to take forceful action to try and get inflation under control,” Wilmington Trust Chief Economist Luke Tilley said.

By front loading rate hikes, he said, the FOMC will have ?more optionality as the year unfolds,? and will be able to accelerate hikes if inflation persists, ?but if any cracks appear in the economic recovery they?ll have the option to slow down while still having rates below their estimate of neutral.?

Triple-A muni yields were cut a basis point or were little changed while UST yields fell up to 23 basis points on the short end.

Author(s): Christine Albano

Publication Date: 15 June 2022

Publication Site: Fidelity Fixed Income

To Fight Inflation, The Fed Declares War On Workers

Mary Pat Campbell

Link: https://www.levernews.com/the-fed-declares-war-on-workers/

Excerpt:

New inflation data released Friday offered dismal news: Historic price increases aren’t showing any signs of abating, and in fact may be accelerating.

What can be done? Federal Reserve Chairman Jerome Powell has an idea: throw cold water on the hot labor market — perhaps the one bright spot in the current economy.

In fact, Powell recently screamed the quiet part out loud, making clear the largest central bank in the world is in fact an adversary to workers, when he declared that his goal is to “get wages down.”

At a May 4 press conference in which he announced a .5 percent interest rate hike, the largest since the year 2000, Powell said he thought higher interest rates would limit business’ hiring demand and lead to suppressed wages. As he put it, by reducing hiring demand, “that would give us a chance to get inflation down, get wages down, and then get inflation down without having to slow the economy and have a recession and have unemployment rise materially.”

Author(s): Julia Rock

Publication Date: 13 Jun 2022

Publication Site: The Lever

Consumer Price Index, 1913-

Mary Pat Campbell

Link: https://www.minneapolisfed.org/about-us/monetary-policy/inflation-calculator/consumer-price-index-1913-

Excerpt:

The U.S. Bureau of Labor Statistics (BLS) began collecting family expenditure data in 1917 and published its first price indexes for select cities in 1919. In 1921, the BLS published a national consumer price index (CPI), including estimates of the CPI back to 1913. The data and methods starting in 1913 are considered generally compatible through the present day; however, the Minneapolis Fed maintains a separate historical table that includes estimates prior to 1913.

The data below use 1983 as the index (1983=100). This chart uses data from the sole measure of CPI available until 1978, after which it reflects the CPI for all urban consumers (CPI-U). The current year’s inflation figures reflect the most recent quarterly data.

You can use the Minneapolis Fed’s inflation calculator to instantly compare the buying power of past and present dollars. However, you can also use the Annual Average CPI numbers below (center column) to make manual calculations. To find out how much a price in Year 1 would be in Year 2 dollars:

Publication Date: Date Accessed 10 June 2022

Publication Site: Minneapolis Federal Reserve Bank

In a Rare White House Meeting, Biden Meets Powell to Discuss Inflation

Mary Pat Campbell

Link: https://mishtalk.com/economics/in-a-rare-white-house-meeting-biden-meets-powell-to-discuss-inflation-guilty-meets-guilty

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PCE stands for Personal Consumption Expenditures. Those numbers come from the Bureau of Economic Analysis (BEA)

CPI stands for Consumer Price Index. Those numbers come from the Bureau of Labor Statistics (BLS)

The key difference is the PCE includes prices paid on behalf of consumers (e.g. Medicare and Medicaid), whereas the CPI only contains prices directly paid by consumers.

The PCE tends to overweight medical expenses while the CPI tends to overweight rent.

The Fed’s preferred measure of inflation is PCE.

CPI and PCE Both Seriously Flawed

Neither measure directly incorporates home prices. Economists explain this away by stating homes are a capital expense. 

OK, so what? The fact is, rising home prices (asset prices in general), are a direct reflection of inflation.

By ignoring asset prices, the Fed helped blow the biggest economic bubble yet. Now the Fed struggles to contain the serious inflation it helped create.


Author(s): Mike Shedlock

Publication Date: 30 May 2022

Publication Site: Mish Talk

Diversity At the Fed and ECB? There is None, It’s a Big Self-Serving Lie

Mary Pat Campbell

Link: https://mishtalk.com/economics/diversity-at-the-fed-and-ecb-there-is-none-its-a-big-self-serving-lie

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At the ECB, you better be gung-ho pro-EU. You better believe negative interest rates are a good idea. And you must back the idea that targeting 2% inflation makes sense.

Finally, if somehow you find yourself at the ECB disagreeing with any of those things, you are expected to shut your mouth so the consensus view never shows any dissent.

….

At FRBNY, I recall the people who ran Treasury markets, money markets, etc. literally had no relevant experience or expertise. The job of staff was to make them appear competent, but it didn’t really matter what they did because Fed can’t fail and they can’t get fired.  

This creates a culture where anyone with talent or ambition GTFO ASAP. There are exceptions, but those who rise tend to be those who have no where else go. It’s a weird structure where the higher you go, the more incompetent you are.

So it’s no surprise Fed is failing

Author(s): Mike Shedlock

Publication Date: 13 May 2022

Publication Site: Mish Talk

The Fed’s Preferred Measure of Inflation Jumps to 6.6%, a 40-Year High

Mary Pat Campbell

Link: https://mishtalk.com/economics/the-feds-preferred-measure-of-inflation-jumps-to-6-6-a-40-year-high

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The PCE price index for March increased 6.6 percent from one year ago, reflecting increases in both goods and services. 

Energy prices increased 33.9 percent

Food prices increased 9.2 percent. 

Excluding food and energy, the PCE price index for March increased 5.2 percent from one year ago.

Author(s): Mike Shedlock

Publication Date: 30 April 2022

Publication Site: Mish Talk