Focus on the ratio of private sector and Fed inflation forecasts
There’s intense interest right now in whether the Fed will offset fiscal stimulus. You want to look at the Fed inflation forecasts, and how they compare to private sector forecasts. In recent years they have been similar. The Fed’s new statement predicts 1.9% inflation next year, and 2.0% thereafter. That’s unchanged from the previous statement. And that’s about what the private sector consensus shows (actually 1.9%), although I don’t know if the private sector incorporates the Trump effect. If they stay close over the next few months, and both stay close to 2.0%, then that implies 100% monetary offset.
The Fed may be lying, but the private sector consensus is not. It may be wrong, but it’s not lying.
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14. December 2016 at 12:13
That’s unchanged from the previous statement.
So where’s the Trump effect?
Let’s assume that they are wrong and that there is a Trump effect. Then the offset is not 100%, at least not at once.
14. December 2016 at 13:14
“There’s intense interest right now in whether the Fed will offset fiscal stimulus.”
Of course they will.
And, I am unconvinced we will see either the sort of infrastructure projects that DJT has promised or the tax-cuts.
It is going to make the R’s look entirely two faced if the pass a budget with a $ Trillion deficit after complaining about the Obama budgets for the last 6 years.
Tax-reform will be will be entirely around the edges with no significant change to gross receipts.
The Fed tightens money to keep inflation below their professed target (the target is, in fact, a ceiling) and NDGP grows below Professor Sumner’s desired target.
14. December 2016 at 13:55
unrelated but scott did u see that stuff from noah smith on the EMH.https://www.bloomberg.com/view/articles/2016-12-14/when-to-send-an-investing-model-into-retirement
14. December 2016 at 14:03
Um, Doug? Yeah what part of the Trump Experience we are all now a part of suggests that being two-faced is any kind of a problem for him, or Republicans, or Democrats for that matter?
14. December 2016 at 15:10
More significantly, to me anyway, is the markets are on board with inflation expectations of 1.5% trending up to 2% over the next couple years, judging by TIPS spreads.
Scott, do you know if Yellen is increasing IOER in concert with the increase in the Fed Funds Rate just announced? Should she?
14. December 2016 at 15:21
“what part of the Trump Experience we are all now a part of suggests that being two-faced is any kind of a problem for him”
Trump has flip flopped on more positions that to say two-faced isn’t enough faces.
As for the rest of congress, yes they are all whores.
So perhaps I am projecting my own opinion that fiscal stimulus is not needed and would be bad policy, onto the reality the Trump has very few friends in congress right now. Maybe he will charm them. Or, maybe the whores will latch onto the coat-tails of a man who can get what he wants. But something has to change for Trump to push an agenda. And, change in DC happens at a glacial pace.
14. December 2016 at 15:53
Since (1) money is short-term neutral and (2) the Fed largely follows the market, it’s hard to imagine any ‘offset’. Re the former point, just read Bernanke’s 2002 FAVAR paper (which Sumner refuses to read, like peasants and the medieval Catholic bible). Re the latter point, just notice how market rates always seems to rise before the Fed acts (most of the time, though I agree there are genuine shocks, like the 1994 Greenspan raising of interest rates). Of course you could claim that Fed ‘transparency’ is the reason the market anticipates Fed moves, or, equivalently, you could claim, like I do, that the Fed simply follows the market. A sort of “real bills doctrine” by analogy, if you know your monetary history.
14. December 2016 at 16:46
Fed is expected to soon raise rates. How will they do that? By reducing the amount of credit expansion facilitated by boosting reserves through OMOs.
Recession incoming with Trump in the WH.
Who said the Fed is apolitical again?
14. December 2016 at 16:49
Why isn’t NGDP the measure of offset? There won’t be offset as higher rates are loose policy IMO. More interest income to the economy.
14. December 2016 at 16:56
Since (1) money is short-term neutral and (2) the Fed largely follows the market, it’s hard to imagine any ‘offset’.
Isn’t it the point of Keynesianism as well that money is not neutral? So what big theory are you following again? Maybe we should call it Lopezism?
14. December 2016 at 17:20
Interesting post.
Is the Fed in effect saying that the inflation target is a ceiling of 2% rather than an average?
The recent paper from the Richmond Fed branch suggested that the Fed has been getting tighter more or less consistently since 1974, if one uses a Taylor type rule to measure Fed tightness. Even if we set aside the 1970s, the Fed has been getting consistently tighter since the 1980s.
This observation fits well with declining interest and inflation rates seen in the last 35 years.
Is there yet again a tighter Fed in future years?
14. December 2016 at 20:18
Bloomberg headline
Hong Kong Property Shares Turn Toxic as Mortgage Costs Spike
A reminder of David Beckwith observation that much of the global economy perhaps more than 40% is tied to Fed monetary policy.
14. December 2016 at 21:27
Brian, I am sure she is, as otherwise the Fed would have no way to make the fed funds rate go up. They can’t just order a higher fed funds rate, then need to either raise IOR, or immediately withdraw 2.5 trillion in money from circulation. I think we can rule out the latter.
Ray—The world’s only Keynesian who thinks money is neutral. That makes you unique, a sort of intellectual unicorn. How interesting!!
You were one of the people I had in mind when I referred to commenters not even clever enough to troll.
Matthew, If the Fed was targeting NGDP, then NGDP would be the measure of offset. But they are targeting inflation, so that’s the indicator of offset.
Christian, Yes, but don’t disturb Ray’s pleasant dreams.
15. December 2016 at 04:14
@ssumner – you have it bass-ackwards. And yes, I’m trolling you (yet still right).
@Christian List – “Isn’t it the point of Keynesianism as well that money is not neutral? So what big theory are you following again? Maybe we should call it Lopezism?” – you got it backwards. I am saying money *IS* largely short-term neutral, unlike both Keynesianism and monetarism. That said, I think fiscal policy makes more sense than monetary policy, caeteris paribus. As our friend Ben Cole would not know, Japan invading China pre-WWII and extracting resources out of it (i.e., fiscal policy) got Japan out of depression, not simply printing yen (i.e., monetary policy), see https://en.wikipedia.org/wiki/Economy_of_Manchukuo
15. December 2016 at 05:28
OT- Time for a Keynesian redux: https://www.theguardian.com/business/2016/dec/11/keynesian-economics-is-it-time-for-the-theory-to-rise-from-the-dead
Indeed, Keynes had one thing right: investment is driven by ‘animal spirits’ which cannot be modeled. I soundly agree. Economics is non-linear, irrational, not prone to simplistic models of the kind Sumner advocates.
15. December 2016 at 06:08
Funny how according to Matt Yglesias, when fiscal stimulus was part of Hillary Clinton’s agenda for 2017 (!) it was part of “a multi-pronged push to boost middle-class incomes” and “back-to-basics middle-class populism,” but now that fiscal stimulus is part of Trump’s agenda it “probably won’t work” and is “bad news for America.” …because of — you guessed it — monetary offset.
15. December 2016 at 07:05
Paul, I don’t find those sorts of “refutations” to be at all persuasive.
No Ray, I’m trolling you, but you don’t realize it yet.
As for revising Keynes, you do know that his entire model depends on money non-neutrality, don’t you? Glad you finally came around.
Jacob, There’s a lot of that going around. I suppose Matt would say it depends on the type of stimulus, but I don’t think that explains all the recent flip flops I see out there.
15. December 2016 at 08:19
“I am saying money *IS* largely short-term neutral, unlike both Keynesianism and monetarism” and “investment is driven by ‘animal spirits’ which cannot be modeled”.
————-
Both points are patently absurd Mr. Lopez.
#1, the transactions velocity of circulation, money velocity (not income velocity, Vi), is so astronomically high (a turnover # which is now just required to maintain prices at current levels; unless the Fed inflates the money stock), that any injection of new money into the economy is immediately registered in AD (as money flows demonstrably show).
The importance of Vt in formulating – or appraising monetary policy derives from the obvious fact that it is not the volume of money which determines prices and inflation rates, but rather the volume of money flows relative to the volume of goods and services offered in exchange.
Savers never transfer their savings out of the CB system. And so virtually all demand drafts, clear thru DD Vt. And money has to be confined to assets that constitute means-of-payment and are controllable. Currency is not such an asset.
The 300 Ph.Ds. on the Fed’s research / technical staff have not yet grasped the fact that managing interest rates (in the short-term) is antithetical to the proper management of the money stock.
Stop-gap N-gDp targeting will work better than interest rate manipulation, but doesn’t have the same precision as using money flows.
15. December 2016 at 08:26
The consensus inflation forecasts this year are too low. The rate-of-change, roc, in money flows (proxy for inflation) bottoms this December and then accelerates during 2017 (i.e., without any money growth stimulus whatsoever).
Thus, the Fed is between a rock and a hard place. And this should be of great concern to pensioners and retirees because Congress inevitably has to cut social security benefits.
15. December 2016 at 09:11
“unrelated but scott did u see that stuff from noah smith on the EMH.https://www.bloomberg.com/view/articles/2016-12-14/when-to-send-an-investing-model-into-retirement”
And the reply by the Young Economists of America to it?
https://www.reddit.com/r/badeconomics/comments/5ii7lb/noah_smith_posted_clickbait_you_wont_believe_the/
15. December 2016 at 09:55
LOL. My model hasn’t failed in over 100 years.
15. December 2016 at 11:06
@flow5: that’s a great model, which island that you own are you posting from?
15. December 2016 at 11:36
LOL. I sold my island.
15. December 2016 at 11:50
POSTED: Dec 13 2007 06:55 PM |
The Commerce Department said retail sales in Oct 2007 increased by 1.2% over Oct 2006, & up a huge 6.3% from Nov 2006.
10/1/2007,,,,,,,-0.47,,,,,,, -0.22 * temporary bottom
11/1/2007,,,,,,, 0.14,,,,,,, -0.18
12/1/2007,,,,,,, 0.44,,,,,,,-0.23
1/1/2008,,,,,,, 0.59,,,,,,, 0.06
2/1/2008,,,,,,, 0.45,,,,,,, 0.10
3/1/2008,,,,,,, 0.06,,,,,,, 0.04
4/1/2008,,,,,,, 0.04,,,,,,, 0.02
5/1/2008,,,,,,, 0.09,,,,,,, 0.04
6/1/2008,,,,,,, 0.20,,,,,,, 0.05
7/1/2008,,,,,,, 0.32,,,,,,, 0.10
8/1/2008,,,,,,, 0.15,,,,,,, 0.05
9/1/2008,,,,,,, 0.00,,,,,,, 0.13
10/1/2008,,,,,,, -0.20,,,,,,, 0.10 * possible recession
11/1/2008,,,,,,, -0.10,,,,,,, 0.00 * possible recession
12/1/2008,,,,,,, 0.10,,,,,,, -0.06 * possible recession
Trajectory as predicted:
BERNANKE SHOULD HAVE SEEN THIS COMING. IN DEC. 2007 I COULD.
15. December 2016 at 11:56
This is how I denigrated Nassim Nicholas Taleb’s “black swan” theory 6 months in advance and within 1 day:
To: anderson@stls.frb.org
Subject: As the economy will shortly change, I wanted to show this to you again – forecast:
Date: Wed, 24 Mar 2010 17:22:50 -0500
Dr. Anderson:
It’s my discovery. Contrary to economic theory and Nobel Laureate Milton Friedman, monetary lags are not “long & variable”. The lags for monetary flows (MVt), i.e., the proxies for (1) real-growth, and for (2) inflation indices, are historically, always, fixed in length. However the lag for nominal gdp varies widely (I am using the Board of Governors’ required reserves figures). Of course rates-of-change in bank debits work better.
Assuming no quick countervailing stimulus:
2010
jan….. 0.54…. 0.25 top
feb….. 0.50…. 0.10
mar…. 0.54…. 0.08
apr….. 0.46…. 0.09 top
may…. 0.41…. 0.01 stocks fall
Should see shortly. Stock market makes a double top in Jan & Apr. Then real-output falls from (9) to (1) from Apr to May. Recent history indicates that this will be a marked, short, one month drop, in rate-of-change for real-output (-8). So stocks follow the economy down.
15. December 2016 at 12:11
1/1/2016 ,,,,, 0.068
2/1/2016 ,,,,, 0.020 stocks bottom
3/1/2016 ,,,,, 0.043
4/1/2016 ,,,,, 0.041
5/1/2016 ,,,,, 0.045
6/1/2016 ,,,,, 0.073
7/1/2016 ,,,,, 0.109
8/1/2016 ,,,,, 0.111
9/1/2016 ,,,,, 0.112
10/1/2016 ,,,,, 0.039
11/1/2016 ,,,,, 0.105
12/1/2016 ,,,,, 0.124 stocks should top
1/1/2017 ,,,,, 0.093
2/1/2017 ,,,,, 0.063
15. December 2016 at 12:14
flow5 (2/26/07; 14:34:35MT – usagold.com msg#: 152672)
Suckers Rally
If gold doesn’t fall, then there’s a new paradigm.
============
Some people think Feb 27, 2007 started across the ocean. “On Feb. 28, Bernanke told the House Budget Committee he could see no single factor that caused the market’s pullback a day earlier”. In fact, it was home grown. It was the seventh biggest one-day point drop ever for the Dow. On a percentage basis, the Dow lost about 3.3 percent – its biggest one-day percentage loss since March 2003.
15. December 2016 at 12:23
The exact top in stocks:
• « Reply #187 on Jul 21, 2011, 8:31pm »
• ——————————————————————————–
•
• “the stock market should be topping & in the process of a downtrend (i.e., without further stimulus).”
•
15. December 2016 at 12:36
My call for the bottom in oil in January 2016:
“Lags are constants but “K” is not. K is the reciprocal of Vt. The bottom isn’t Dec. but Jan. (like last year)”
Sep 24, 2015. 11:56 AM
15. December 2016 at 12:38
This is the time series for money flows, bank debits. Whereas RRs are a surrogate:
http://monetaryflows.blogspot.com/2010/07/monetary-flows-mvt-1921-1950.html
15. December 2016 at 12:41
msgkings:
It’s people like you that are responsible for the predicament that this country is in today.
Why don’t you just butt out
15. December 2016 at 12:47
Flow5, Fascinating. Tell me more.
Jim, I don’t pay attention to those sorts of posts. The EMH isn’t going anywhere.
16. December 2016 at 09:20
@flow5: pretty touchy for a guy with a 100-year can’t fail model that he’s gotten rich with.
16. December 2016 at 09:26
@msgkings:
Touchy as in hyperthyroidism. And I don’t cater to morons (which is what you obviously are). As Jim Sloman (sold the Delta Phenomenon to Welles Wilder for a million), “you bring your expectation to it”
16. December 2016 at 09:55
@flow5: So many can’t fail models, so much insecurity. I’ve been called far worse by far better than you. 🙂
16. December 2016 at 10:35
The very fact that you drew “first blood” indicates that you are insecure.
16. December 2016 at 10:43
The main body of this material is taken from a cardiac surgeon, Dr. Christopher Thomas’ “IMTRAC” (whose father was CEO of Gulf Oil) in conjunction with James Sinclair (whose father started the OTC stock market). It was written by Dr. Leland Prichard, Ph.D., Economics Chicago, 1933 (Milton Friedman was also in Viner’s and Mint’s classes):
The transactions concept of money velocity, Vt, has its roots in Yale Professor Irving Fisher’s truistic “equation of exchange”: P*T = M*Vt, where (1) M equals the volume of means-of-payment money; (2) Vt, the transactions rate of turnover of this money; (3) T, the volume of transactions units; and (4) P, the average price of all transactions units.
The “econometric”, read MIT, people don’t like the equation because it is impossible to calculate P and T. Presumably therefore the equation lacks validity. Actually the equation is a truism – to sell 100 bushels of wheat (T) at $4 a bushel (P) requires the exchange of $400 (M) once, or $200 (Vt) twice, etc.
Yale Professor Irving Fisher – 1920 2nd edition: “The Purchasing Power of Money”
“If the principles here advocated are correct, the purchasing power of money — or its reciprocal, the level of prices — depends exclusively on five definite factors:
(1)the volume of money in circulation;
(2) its velocity of circulation;
(3) the volume of bank deposits subject to check;
(4) its velocity; and
(5) the volume of trade.
“Each of these five magnitudes is extremely definite, and their relation to the purchasing power of money is definitely expressed by an “equation of exchange.”
“In my opinion, the branch of economics which treats of these five regulators of purchasing power ought to be recognized and ultimately will be recognized as an EXACT SCIENCE, capable of precise formulation, demonstration, and statistical verification.”
And the Fed already validated the Fisherian theory: In 1931 a commission was established on member bank reserve requirements. The commission completed their recommendations after a 7 year inquiry on Feb. 5, 1938. The study was entitled “Member Bank Reserve Requirements — Analysis of Committee Proposal”
It’s 2nd proposal: “Requirements against debits to deposits”
http://bit.ly/1A9bYH1
After a 45 year hiatus, this research paper was “declassified” on March 23, 1983. By the time this paper was “declassified”, RRs had become a “tax” [sic].
Contrary to Bankrupt-u-Bernanke forecasts are no puzzle: “Unfortunately, beyond a quarter or two, the course of the economy is extremely hard to forecast”, economic prognostications (extraordinary movements in flow), within a year’s period are infallible.
The sharp increase in DD velocity since 1964 is the consequence of a variety of factors which include 1) the daily compounding of interest on savings accounts in commercial banks and “thrift” institutions, 2) the increasing use of electronics to transfer funds, 3) the introduction of negotiable commercial bank certificates of deposits, and 4) the rapid growth of ATS (automatic transfers of savings to DDs) and NOW (negotiable orders of withdrawal) accounts.
During the decade ending in 1964; aggregate monetary demand increased at an annual compounded rate of c. 6 per cent. In the nine subsequent years, it increased at an annual compounded rate of c. 13 per cent. In the 1972-73 period, 30 per cent (substituting DD turnover for Vt). Because R-gDp, and presumably, the volume of goods and services offered in the markets was increasing at a rate of less than per cent, it should come as no surprise that a result was an intensification of the chronic rates of inflation to devastating levels.
But the most important single factor contributing to the increased rate of money turnover probably was those structural changes, viz., gate-keeping, which made virtually all time deposits the equivalent of low velocity demand deposits (the “monetization of time/savings deposits”). These changes included the virtual elimination of Regulation Q (interest ceilings on time deposits) and the introduction of interest bearing checking accounts known as money market demand accounts. Fortunately, these were one-time events. High interest rates and expectations of higher prices were both cause and effect of rising rates of Vt.
The Depository Institutions Deregulation and Monetary Control Act of 1980, by legalizing the use of the NOW type of checking accounts by Savings and Loans, S&Ls, Credit Unions, CUs, and Mutual Savings Banks, MSBs, immensely accelerated the rise in Vt, as did the introduction of money market funds, MMFs. All the G.6 release reported drafts drawn on these institutions cleared through DDs – except those drawn on MSBs, interbank & the U.S. government.
1) MSB balances in the commercial banks, CBs, were designated as inter-bank demand deposits, IBDDs, presumably because MSBs are call banks. MSBs always have been, and are intermediary financial institutions – intermediary between saver and borrower (an error in money stock reporting since the Fed’s inception, but inadvertently corrected when the Fed failed to redefine the money aggregates after the DIDMCA).
The rapid expansion of the ATS and NOW accounts also was responsible for the precipitous decline of the money supply M1A (currency held by the nonbank public and DDs). As well as contributing to the extraordinarily sharp increase in Vt beginning in November, 1980.
Contrary to the conventional wisdom, the expansion of the various types of checking accounts offered by the intermediaries (non-banks) has not been at the expense of the CBs as a group. When the owners of (saved) DDs transfer these funds to the intermediaries, the funds are immediately invested in some type of earning asset – including CB negotiable CDs. If the saver transfers the funds to an ATS account, that too, simply results in a shift in the type of liabilities held by the CBs.
It was not by happenstance that the $27 billion decline of DDs from November, 1980 to May, 1981 is almost exactly matched by the growth of CB ATS accounts and negotiable CDs.
If the member CBs were operating with an excess volume of excess legal reserves, then it could be said that the volume of bankable investments was inadequate, and that the intermediaries were acquiring investments or loans the CBs would otherwise hold.
But the Member CBs have no excess legal lending capacity, and the nonmember CBs are presumably operating at their economic limits. The legal reserves of the non-member CBs still exercise no constraint on their expansion as these reserves are defined under the so-called DIDMCA. On the other hand, the growth of any intermediary does deny investable funds to other intermediaries. Retail and Institutional Money Market Funds, MMMFs, growth had, for example, a serve effect on the S&Ls and the MSBs and to a lesser extent, the CUs.
The importance of Vt in formulating – or appraising monetary policy derives from the obvious fact that it is not the volume of money which determines prices and inflation rates, but rather the volume of monetary flows relative to the volume of goods and services offered in exchange.
The real impact of monetary demand on the prices of goods and services requires the analysis of “monetary flows”, and the only valid velocity figure in calculating monetary flows is Vt. Milton Friedman’s income velocity, Vi, (WSJ, Sept. 1, 1983) is a contrived figure [Vi = N-gDp/M]. The product of M*Vi is obviously N-gDp. So where does that leave us? in an economic sea without a rudder or an anchor.
A rise in N-gDp can be the result of (1) an increased rate of M*Vt (which by definition the Keynesians have excluded from their analysis), (2) an increase in R-gDp, (3) an increasing number of housewives selling their labor in the marketplace, etc. The income velocity approach obviously provides no tool by which we can dissect and explain the inflation process.
To the Keynesians, aggregate monetary purchasing power, AD, is N-gDp, the demand for services (human) and final goods. This concept excludes the common sense conclusion that the inflation process begins at the beginning (with raw material prices and processing costs at all stages of production) and continues through to the end.
Admittedly the data for Vt are flawed. So are nearly all economic statistics, but that does not preclude us from using them. An educated estimate is better than no estimate at all. This, of course, is the triumph of good theory over inadequate facts.
The Fed first calculated deposit turnover in 1919 (up to 1996, the Fed’s longest running time series). It reported weekly until 1941 (like M3, the series was also discontinued, in Oct. 1996). The figure “other banks’’ was used. Prior to this revision Vt included all banks located in 232 SMSA’s excluding N.Y. City. This was the best that could be done to eliminate the influence on prices of purely financial and speculative transactions (though financial transactions, “animal spirits”, are not random). Obviously funds used for short selling do not contribute to a rise in prices. The Fed calculates these velocity figures by dividing the aggregate volume of debits of these banks against their demand deposits.
In calculating the flow of funds, M*Vt, I am assuming that the Vt figure calculated by the Fed is not only representative all commercial banks in the United States, but that the velocity of currency is the same as for demand deposits. Is this valid? Probably not. But nobody knows (however, roc’s in M*Vt equals roc’s in DD*Vt).
But we do know that to ignore the aggregate effect of money flows on prices is to ignore the inflation process. And to dismiss the concept of Vt by saying it is meaningless (that people can only spend their income once) is to ignore the fact that Vt is a function of three factors: (1) the number of transactions; (2) the prices of goods and services; (3) the volume of M.
Inflation analysis cannot be limited to the volume of wages and salaries spent. To do so is to overlook the principal “engine” of inflation – which is of course, the volume of credit (new money) created by the Reserve and the commercial banks, plus the expenditure rate (velocity) of these funds.
Also overlooked is the effect of the expenditure of the savings of the non-bank public on prices. The M*Vt figure encompasses the total effect of all these monetary flows.
16. December 2016 at 11:02
Dr. Richard G. Anderson asked me not to publicize these comments (prior to the censorship of the Fed’s 300 Ph.Ds. on the Fed’s technical staff):
“The Federal Reserve Plans To Identify “Key Bloggers” And Monitor Billions Of Conversations About The Fed On Facebook, Twitter, Forums And Blogs”
From: Richard.G.Anderson@stls.frb.org
Sent: Thu 11/16/06 9:55 AM
Spencer, this is an interesting idea. Since no one in the Fed tracks reserves, such a coincidence in the data perhaps confirms that the Fed funds rate settings have been correct.
Today, with bank reserves largely driven by bank payments (debits), your views on bank debits and legal reserves sound right!
16. December 2016 at 12:19
LOL the fact that you can’t stop humorlessly and logorrheically posting on some other guy’s blog shows just how ‘secure’ you are.
16. December 2016 at 20:26
I’m dying. And I believe in capital punishment. Assholes like you should be capped.
17. December 2016 at 05:22
Some punk-ass motherfucker isn’t going to discredit me. I discovered the Gospel. It is worth trillions of economic $s. It should be classified as “top secret” by the CIA.
I predicted the higher murder rates in the summer of 2015. I predicted the month they would peak this year.
My post:
I’m sure Putin will find out. Most of my internet traffic is from Russia. Perhaps that’s what it will take to turn heads.
May 22, 2015. 11:47 AMLink