Not surprising that Bullard is surprised!

Apparently, Janet Yellen is a strong leader:

The leader of the Federal Reserve is often described as among the most powerful people in the world. But in late summer, as the Fed weighed whether to raise interest rates for the first time in nearly a decade, Yellen found herself outnumbered.

Yellen wanted to wait. The wild swings in global financial markets over the summer were potentially bad omens for China’s economy — which in turn could drag down America, she feared. But her colleagues were not as worried. A slim majority of the 17 people who make up the central bank’s top brass was willing to start pulling back the Fed’s support for the recovery in September.

One of those was certainly Bullard:

One of the most vocal officials has been St. Louis Fed President James Bullard. He often pushes the envelope of debate at the central bank, and he is the last top official to speak before the Fed’s big decision. In an interview with The Washington Post, he said not raising rates in September was a “mistake” and that the U.S. economy could be ready to take off.


WP: When you review the last seven years that the crisis occurred and the actions that the Fed has taken since then, would it ever have entered your imagination in, say, 2007 that the Fed ever would provide as much stimulus as it did for the economy?

Bullard: No, I would not in 2007 — certainly not in 2007, or even 2008 or 2009 — think that we would be in the position that we’re in today. Historically, when you had big shocks, you also had a period of bounce back that was stronger than what we actually got here. I certainly did not predict that things would linger this long, seven years later. I think that’s been the major surprise in the aftermath of the big crisis.

Bullard never imagines that this time around there was no “bounce back” simply because he (and his colleagues) didn´t want one!

First, see the drop and timid rise in NGDP compared to the two previous cycles

Janet Leader_1

Given sticky nominal wages, the wage/NGDP ratio rises strongly and falls slowly

Janet Leader_2

Explaining the much weaker rise in employment

Janet Leader_3

Why, one could ask, did employment rise much less robustly in the 2001 cycle than in the 1990 cycle, given that NGDP (and wage/NGDP) behaved similarly?

The reason is mostly due to the 2001 recession being a “productivity rich” recession.

Janet Leader_4

HT Kevin Tryon, James Alexander

Give the Fed a new compass. We´re going in the wrong direction

According to the news:

Friday’s employment report clears the way for the Federal Reserve to raise short-term interest rates by a quarter-percentage point at its Dec. 15-16 policy meeting, ending seven years of near-zero interest rates.

The Fed can reasonably well control nominal spending (NGDP) growth. Stable NGDP growth at the appropriate level well defines what good monetary policy is supposed to look like.

If that´s true, when NGDP growth falters, things like employment growth will register the “punch”, just as it will “blossom” when monetary policy pulls NGDP growth up. Stable NGDP growth goes hand-in-hand with stable employment growth (only thing is if NGDP level falls short, so will the level of employment)

Examples from the mid-1990s and early 2000s show the Greenspan years. For the last ten years, we have been under Bernanke and Yellen. The pictures are illustrative. (The montlhy NGDP numbers come from Macroeconomic Advisers)

Throughout the period, inflation was not a problem. By the mid-1990s, it had reached the “low and stable” target of the time. Ironically, after the numerical 2% target was set in January 2012, inflation has languished, but is still “low and stable”!

Employ Report 11-15_1

Employ Report 11-15_2

But if you zoom in on the past 15 months, things seem “fishy”. For all the Fed´s “communication”, the truth is that they have been tightening policy. NGDP growth is coming down which was shortly followed by decreasing employment growth. Won´t even mention inflation.

Employ Report 11-15_3

To wrap up, where´s the much touted wage growth-inflation nexus so cherished by some at the FOMC?

Employ Report 11-15_4

Great harm might be on the way!

PS If you don´t believe me about the “beauty” of stable nominal spending, believe George Selgin:

a central bank that allows the overall volume of spending to collapse has blown it, no matter how much emergency lending it undertakes.  Indeed, to the extent that a central bank engages in emergency lending while failing to preserve aggregate spending, it may be guilty of compounding the damage attributable to the collapse of spending itself with that attributable to a misallocation of scarce resources in favor of irresponsibly-managed firms.

Ah! “Cold-comforting” seasons

Trash seeps into the op-ed page of the WSJ in: “Seasonally Adjusted Jobs Numbers Offer Cold Comfort”:

The U.S. economy lost more than 2.7 million jobs between the middle of December and the middle of January, but the big news from the January jobs report was that the economy added 275,000 jobs during the same period.

It´s true!

Cold Comfort_1

And the reason:

Why the discrepancy? The Bureau of Labor Statistics touts “seasonally-adjusted” figures, which attempt to measure how recurring seasonal events affect employment. The raw figures are available to researchers, but the adjusted figures are the priority in public announcements.

Yet reporting a statistically adjusted figure as if it were original data is a mistake, and a significant distortion of reality that only adds to public distrust of the government and the media. People know that jobs were scarcer in January than in February, even if the government told them the opposite.

It´s “not as if it were the original data”. It´s a seasonally-adjusted data, and it´s not a “distortion of reality”. And why´s that? Just so that the ups & downs (noise) of the seasonal cycle don´t “cloud” the trend (signal). The chart shows a segment of the 1939 – 2015 period just to make the point.

Cold Comfort_2

Now, if the seasonal adjustment is being done properly, if you sum the raw (non seasonally-adjusted) data over the “seasons”, you should get the same result obtained if you sum-up the seasonally-adjusted data. And you do:

Cold Comfort_3

You should also not observe significant differences in the year on year growth rate of both the NSA and SA series. And that´s what you see:

Cold Comfort_4

Interestingly, however, there´s a predilection for presenting output growth data in “noisy” form, specifically as annualized rates of growth. As usual, the “noise” dampens the “signal”. The chart below shows the “imaginary” booms & busts in the annualized data.

“Imaginary” and distortive because it increases “anxiety” when all the while, for the last 5 years, the economy has grown at a monotonously low and stable 2.2% year on year!

Cold Comfort_5