5 ways of thinking about a news headline

Here’s a recent headline at Yahoo.com:

The bond market has already delivered the Fed cut everyone’s been waiting for


1. The public is “waiting for” easy money, but it won’t happen because the declining bond yields reflect a tightening of monetary policy.  NRFPC

2. The declining bond yields reflect anticipation of the liquidity effect from monetary easing.  As Nick Rowe likes to say, policy is 1% concrete actions and 99% expectations.  So it does represent monetary easing.

3. The Fed doesn’t even need to cut rates, as the bond market’s already accomplished the goal.  That’s probably false, as a lack of follow through by the Fed will either lead to a spike in interest rates or a further decline in rates due the the income and Fisher effects.

4. The declining interest rates have nothing to do with monetary policy and do not help the overall US economy, but they do help the housing sector.  This interpretation best fits 2001-4.  During that period, interest rates fell due to weakness in business investment (not easy money), boosting the housing sector.

5.  Rates are falling due to global economic weakness, not economic weakness in the US.  This will lead to more investment in the US (both business and residential.)  The resources used to produce this investment will come out of the production of consumption goods in the US.  The funds to finance the investment will come from foreign saving.  As American consumers increasingly rely on foreign consumer goods, the trade deficit will increase.



15 Responses to “5 ways of thinking about a news headline”

  1. Gravatar of Benjamin Cole Benjamin Cole
    30. July 2019 at 15:08

    Headlines like the one cited are rife. The financial media must believe that easier money leads to lower interest rates. (But then, the neoFisherians say if central banks set interest rates at zero then inflation will collapse— which could lower nominal interest rates. So lowering interest rates leads to lower inflation which leads to lower nominal interest rates).

    Despite Japan being close to deflation again, the financial media insist that the Bank of Japan is following an “ultra-easy” monetary policy.

    If Nick Rowe is correct, then I guess the Fed should relentlessly raise interest rates and express a great deal of fear about inflation. Then the public will believe that there is lots of inflation and will start raising prices vigorously.

  2. Gravatar of Michael Sandifer Michael Sandifer
    30. July 2019 at 15:42

    I say that the declining nominal rates are pricing-in Fed loosening, so that if the Fed does not cut rates as anticipated, the stock market will sell off, shorter term rates may rise a bit, and longer-term rates could fall. NGDP and real GDP growth will fall.

    The neutral rate is falling due to a combination of the trade war and economic weakness overseas, while the Fed has lagged too far behind events. Since the Fed controls nominal rates, the nominal yield curve predicts future Fed interest rate decisions, particular on the short-end. There are other effects, like sometimes the liquidity effect, on the long end. I don’t think liquidity effects will be important on the long end in this case.

    The dollar would be stronger if the Fed fails to meet market expecations for rate cuts, ceteris paribus, worsening the trade deficit, not that it matters.

    House prices would decelerate or fall, due to falling aggregate demand. Never reason from an interest rate change. Have to always reason from aggregate supply and demand in macro.

  3. Gravatar of Benjamin Cole Benjamin Cole
    30. July 2019 at 15:45

    BTW June PCE core at 1.6% yoy and GDP deflator at 1.5%.

  4. Gravatar of Michael Sandifer Michael Sandifer
    30. July 2019 at 15:47

    I should add that while Fed tightening would increase the forex value of the dollar, ceteris paribus, in the short-run, in the long run continued economic weakness would lead to a weaker dollar than otherwise.

  5. Gravatar of Kevin Erdmann Kevin Erdmann
    30. July 2019 at 18:17

    An anticipated liquidity effect seems like a self-negating concept.

  6. Gravatar of James Alexander James Alexander
    30. July 2019 at 21:41

    Markets “persuaded” the Fed to stop the tightening cycle by crashing in December. That was enough for equity markets that recovered. Yet bond yields continued to fall through 1H2019, with a big lurch down in May. Equities seem to be diverging from bonds, but equities are both the expected future growth of earnings and the value of those earnings. Multiple expansion (a higher future PE ratio) can imply less growth but more value – and that is what we have recently been seeing. In other words equities are pricing in less growth too, despite the recovery. (See page 27 of this weekly report)


  7. Gravatar of ChrisA ChrisA
    30. July 2019 at 23:39

    Scott – I was wondering similar for the recent drop in UK pound vs US dollar, now down to 1.21 vs 1.28. Is this due to fear of Hard Brexit (as many media outlets have it) or the market belief that in a Hard Brexit scenario the BoE will reduce IR as a preemptive measure.

    Regardless of the reasons for the drop, will the drop in exchange rates effectively be a rate cut? It seems to me that in the short term it could actually decrease overall demand, since imported products would be more expensive and it will take a while to increase exports. Longer term it appears stimulative since there will presumably be import substitution and also increased exports due to lower UK input costs.

    What is also interesting about this situation, especially with reference to the previous post on inflation response to demand stimulation, is that there doesn’t appear to be any inflation response expected in the UK, UK guilt yields just touched historical lows for instance.

  8. Gravatar of Michael Rulle Michael Rulle
    31. July 2019 at 03:38

    The Global Economy has been weaker than expected and the forecast is it will continue to be weak. The Fed always tightens in the end. 2% is a cap, not a a so called target, and they keep not making up for inflation shortfall. Employment percent numbers exaggerate strength of labor market. Inflation numbers are a construct—-which we all know are overstated.

  9. Gravatar of TallDave TallDave
    31. July 2019 at 06:00

    Glad to see a rate cut expected today….Fed seems to be getting a bit closer to NGDPLT, or at least taking the NGDP trend into consideration — last few Qs all right around 5%. Latest move really feels like it’s aimed at bringing expected Q3 NGDP growth closer to 4-5%.

  10. Gravatar of Brian Donohue Brian Donohue
    31. July 2019 at 06:01

    It seems to me the “new normal” of low, long-term real interest rates has yet to completely sink in, but we’re getting there.

    In the future, we will understand that short-term rates above 2% are “high”, and these rates will cycle between, say 0% and 2%.

    Now, a 0.25% change at 2% is a helluva lot of a bigger deal than a 0.25% change at 6%. In the new normal world, greater granularity and real-time updating are important needs, as you have mentioned.

    The rest of the yield curve will tell you where to go. Right now, it says down.

  11. Gravatar of Philo Philo
    31. July 2019 at 07:43

    “The resources used to produce this investment will come out of the production of consumption goods in the US.” This sentence is ambiguous. (1) Do you mean *more investment than occurred previously* or *more investment than would have occurred if foreign economies had been stronger and, consequently, interest rates higher*? (2) You seem to mean that funding will go more to investment (the production of capital goods) than to consumption (the production of consumption goods) than had been the case previously or than would have been the case with stronger foreign economies and higher interest rates. But your sentence could possibly be interpreted as meaning that the funds for greater investment would be derived from the production of consumption goods. (Obviously not what you meant, but the sentence gives the reader pause.)

    In this scenario–your #5–the U.S. trade deficit will increase (relative to the past, or relative to the hypothetical situation of strong foreign economies and higher interest rates) *whether or not the American consumer increases his consumption of foreign goods*.

  12. Gravatar of ssumner ssumner
    31. July 2019 at 07:47

    James. I’ve made the same argument. Stocks reflect a combination of falling interest rates and falling growth expectations, which roughly balance out in terms of their impact on stocks.

    Chris, Yes, similar to interest rates. Reasoning from an exchange rate change is just as big a mistake as reasoning from an interest rate change. A hard Brexit would probably reduce British growth, which is why the pound is falling. The falling pound is not an exogenous shock.

    Good point about the lack of inflation expectations—this is a fall in the real exchange rate.

    Talldave, I’d expect NGDP growth to gradually slow. I wish they were targeting it, but they still have the 2% inflation target. Nonetheless, I do think they are now paying more attention to NGDP.

  13. Gravatar of Neon__Wolf Neon__Wolf
    31. July 2019 at 08:43

    The Fed has been raising its key rate though, by reducing its rate of money issuance, and that then puts downward pressure on aggregate nominal demand, and that forces borrowers and lenders to lower the multitude of rates on loans throughout the economy.

    Other locations like the EU and China have been pumping their economies with more money at higher rates, which is giving them an unfair advantage.

  14. Gravatar of Kevin Erdmann Kevin Erdmann
    31. July 2019 at 10:34

    Rate cut was slightly below market average expectations and the yield curve flattened on the news.

  15. Gravatar of Michael Rulle Michael Rulle
    31. July 2019 at 12:14

    The Fed will always tighten in the end—it is its nature

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