The blameless crowd

They are masters in shifting responsibility.  See “ECB’s Nowotny: Don’t Blame Central Bankers for Low Rates”:

The low interest rate environment has more to do with economic developments, rather than the autonomous actions of central banks, said European Central Bank Governing Council member Ewald Nowotny in a speech Thursday. He added that in this environment it was difficult for a central bank to set interest rates on its own.

Speaking at a conference in Alpbach, Austria, Mr. Nowotny said that one of the factors keeping inflation down is globalization. Low prices are “an advantage for consumers, but puts pressure on wages,” he noted.

Moreover, growth is also relatively low. “We have a trend of long-term, low growth rates, which is not easy to interpret,” he said.

In his pre-Jackson Hole ‘manifesto’:   John Williams shows this chart


And writes:

The underlying determinants for these declines are related to the global supply and demand for funds, including shifting demographics, slower trend productivity and economic growth, emerging markets seeking large reserves of safe assets, and a more general global savings glut.

Although the main reason was starring him in the face, it is never acknowledged. And that reason is the simultaneous crash in NGDP, resulting from sweeping the monetary policy framework pursued during the great moderation under the rug, first by the Fed, immediately followed by the other nincompoops.


If interest rates “disappear”, Central Banks lose their relevance!

In Central Bankers’ Main Challenge: Staying Relevant – Decline in the natural interest rate gives authorities less ammunition to counteract economic shocks, Grep Ip writes:

When central bankers gather this week in Jackson Hole, Wyo., they will be consumed not with some pressing crisis in the global economy but by an existential threat to their relevance.

The threat stems from the realization that the sluggish economic growth that has prevailed since 2009 may be here to stay. If so, then so are today’s low interest rates.

For more than 8 years they´ve been shooting themselves in the foot, refusing to abandon their inflation target framework and the associated interest rate targeting (which now they desperately want to “normalize”).


Somebody switched the pedals in John Williams´ car

John Williams´WAPO  interview is mindboggling:

So, just cutting to the chase here, does that gradual path of rate increases include any this year, in your view?

In my view, it does. We’ve been adding enormous policy accommodation over the past several years. As the economy gets closer to its goals, we can again pull our foot off the gas a bit and hopefully execute a nice, soft landing over the next couple of years.

The “eagle” has landed a long time ago, only in the wrong “runway”. It´s now in the process of shifting even lower!

Switched Pedals

HT Kevin Tryon

Update: Seems his pedals were switched a long time ago! Note that was the time NGDP growth began to slow down. Thinking his foot was on the accelerator when in fact his mouth began pressing the brake.

The Fed wastes time “star trekking”!

While the Fed goes “star trekking”, nominal stability is forsaken. As Bernanke argues, the FOMC´s forecast of the “star variables” – y*, u*, and r* – which, respectively, denote potential real output, natural rate of unemployment and the neutral interest rate, variables over which the Fed has no control, have been systematically downgraded. His table illustrates:

Star Trek_1

And Bernanke concludes:

FOMC communications also have been affected by the recent revisions in the Fed’s thinking. It has not been lost on Fed policymakers that the world looks significantly different in some ways than they thought just a few years ago, and that the degree of uncertainty about how the economy and policy will evolve may now be unusually high. Fed communications have therefore taken on a more agnostic tone recently. For example, President Bullard of the St. Louis Fed has recently proposed a framework which implies that, in most circumstances, economic forecasters can do no better than to assume that tomorrow’s economy will look like today’s. Other participants, noting earlier failures of forecasting, have argued that (for example) policy should not react until inflation has actually risen in a sustainable way, as opposed to being only forecast to rise. In general, with policymakers sounding more agnostic and increasingly disinclined to provide clear guidance, Fed-watchers will see less benefit in parsing statements and speeches and more from paying close attention to the incoming data.

To argue that you should all but ignore the Fed is certainly very confusing!

Meanwhile, the people at Gavekal are on the right track when they write:

We were fortunate enough to have Nancy Lazar, from Cornerstone Macro, in our office today and she emphasized a very important point: nominal GDP is ultimately what really matters.

Nominal growth is what drives corporate revenue, and in turn, drives business spending. Because businesses are the backbone of any economy, trends in nominal GDP greatly impact inflation, wage growth, consumer spending, capex and interest rates to name just a few macro economic variables.

When the first release of 2Q GDP came out in late July, we noted how the 10-year annualized change in GDP had fallen to just 2.94%, which is the lowest growth rate on record going back to 1957. In the subsequent charts below we see how this structural decline in nominal GDP is reverberating through other parts of the economy.

There´s a better way to see the importance of nominal stability – the appropriate level and growth rate of nominal GDP (NGDP). In the panel below, which charts NGDP growth at time t against growth at time t+1, we see that what came to be called “Great Moderation”, characterized by stable real growth and stable and low inflation, was a period in which NGDP growth was stable and evolving along a stable trend level path.

Star Trek_2

During the “Great Inflation” we see that NGDP growth was excessive and upward trending. At present (“Great Stagnation”), after trending down, NGDP growth has once again come back into the “stability circle”. However, NGDP growth is “too low” and is evolving along a trend path that is also too low. In fact, as the chart below indicates, it appears that since 2014 NGDP growth is even veering off from this lower path.

Star Trek_3

No surprise, then, that “Fed communications have taken on a more agnostic tone”. As Bernanke argues: “It has not been lost on Fed policymakers that the world looks significantly different in some ways than they thought just a few years ago.” And what´s different is of Bernanke´s own making when, as Fed Chairman, he let NGDP (something which the Fed can closely control, in contrast to the “star variables”) drop significantly. But since they don´t know “what´s different”, stay tuned for more Fed mistakes going forward!

“Headwinds”: Code for “Fed”

Ms. Yellen has said headwinds are holding back the economy. Right! The Fed is working full-time to that end. And, if they continue their quixotic search for the “neutral rate”; if they continue to believe inflation will climb to target sometime in an unknown future date; if they continue to believe the labor market is “strong”; they will be surprised to see the fed funds rate remaining unchanged for “years to come”!