The “Monetary Policy Normalization” Syndrome

It has been the force behind US monetary policy for at least the past two years. It can be captured by the behavior of the 1-year ahead expected FF rate, which coincides with the intensification of the “rate rise talk”.

The chart below is a representative example, showing how policy started tightening long before the December/15 rate increase.

Mp Normalization_1

The same is true if you chart inflation expectations, industrial production growth, stock market returns or oil prices alongside the FF future rate.

The “summary statistic” for the policy tightening stance is given by the declining behavior of NGDP (and RGDP) growth since mid-14.

Mp Normalization_2

The fact is that the Fed has “abandoned” the inflation target, or is really content with the low inflation that has materialized in large measure as a consequence of the effective policy tightening.

Mp Normalization_3

Not to be ‘blindsided’, some in the Eurozone have also begun to appeal for monetary policy normalization. An example is given by the recent CEPS study which argues for adopting the GDP deflator as the target, minimizing the worries about deflation captured by the CPI, concluding:

“It is time for a normalization of global monetary policy.”

Mp Normalization_4

No wander the “recession talk” has been on the rise!


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