Looking for excuses to “tighten”

It´s all about the labor market. Until March of this year the unemployment interest rate trigger was 6.5% (as long as inflation was not higher than 2.25%. With unemployment getting “uncomfortably” close to the trigger point but with inflation far below target, the FOMC ditched the 6.5% specification from its communications.

Unemployment has continued to drop and is now at 5.8%, closing in on the conventional 5.5% definition of “full employment” (i.e. no “slack”). Unfortunately for Janet(Phillips Curve)Yellen, inflation languishes way below target (unless their actual target is the 1%-2% interval as some posit).

What the Fed does not “capice” is that monetary policy is already tight, although not as tight as in the Euro Zone.

The charts illustrate.

Tighten Excuse_1

See that inflation only touched the 2% target on two occasions in the last six years!

And for many years there has been no inkling of wage pressure despite the fall in unemployment.

Tighten Excuse_2

Furthemore, all medium and longer term inflation expectations, be it of the survey, market or tweeked from data variety , show expectations are subdued.


5 thoughts on “Looking for excuses to “tighten”

  1. Too right. Market fears too many people at the Fed are like the former NY Fed economist quoted here commenting about the jobs data on Friday:
    ‘ “The initial market reaction, at least in the Treasury space, is the wrong one,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC in New York. “If you just look at the headline — and in fairness, I think a lot of people do — you would really miss a lot of positive nuances of this report.”
    Porcelli cited the Labor Department’s aggregate weekly payrolls index, which takes into account hours, earnings and employment. It was up 4.8 percent in the 12 months through October, marking the strongest gain since March 2012.
    “I don’t think it changes anything for the Fed,” Porcelli said of the jobs report. A former Federal Reserve Bank of New York researcher, he correctly projected today’s drop in unemployment and expects an interest-rate increase in mid-2015.’

    • Agreed. I just think that the market-implied inflation expectations are the nearest thing we get to market-implied NGDP. Far away, I know, but nearer than anything else.

  2. The performance of the Fed, BOE and ECB is classic agency behavior. They are scared of being criticized if inflation goes above 2% on a sustained basis. So they work to eliminate that risk to themselves at the expense of the greater economy. The way to deal with agency issues to align your agents with the proper incentives. So don’t blame the central bankers, blame the political policy makers who create these incentives. Obama for instance could quite easily start a debate about the damage of low inflation and the need for a level targeting by the Fed. As you have shown, Nixon could get away with pressuring the Fed. Obama chooses the head of the Fed and the other members of the committee. In a similar fashion, so does the Chancellor of the BOE (as we saw with Carney). So we need to work on the politicians, not the CBs.

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