Good news, bad news

The good news is that the Fed is unlikely to raise rates in the near future.  The bad news is that the Fed is unlikely to raise rates in the near future.  How can two mutually exclusive claims both be true?  If you can’t embrace contradictions, then you are not a true macroeconomist.  (I’m looking at you Bob.)

The good news is that given the condition of the economy, the Fed is unlikely to raise rates soon.

The bad news is that the Fed’s unlikeliness to raise rates soon shows the poor condition of the economy, caused by the Fed itself.

The Fed is unlikely to raise rates soon because in 2015 they signaled that they were anxious to tighten monetary policy, which lowered expected NGDP growth.  The market also knows that (just as in 1937) the Fed is reluctant to admit mistakes, because it makes them look bad.  So they wait too long to change course (as in 1937-38.)  That’s already priced in, already being factored into investor’s decisions. So if a negative shock comes along (say a fall in velocity) the Fed is not prepared to react.

Here’s a fed funds futures bleg.  Am I reading the table below correctly, that the markets expect roughly a 0.9% fed funds rate in December 2017?  If so, it would be below the 1.0% figure that Fed insiders laughed at back in September, when Kocherlakota’s dot was trailing far behind all the others.  Now it looks like even he was too pessimistic optimistic (and I was even further off course, but at least not as far off as the Fed.)  Just as Jimmy Carter “promoted” G. William Miller to the meaningless job of Treasury Secretary after just 18 months on the job, and replaced him with Volcker, Obama should promote Yellen to Treasury Secretary, and replace her with Kocherlakota.

Kocherlakota was right, the Fed should have cut rates in September.  I’m embarrassed to admit that I missed that call.

The much, much, much bigger story here (which I predict readers will overlook) is that the Fed desperately needs a new policy regime.  It’s the lack of level targeting, stupid.

Screen Shot 2016-01-20 at 1.38.41 PM

 


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44 Responses to “Good news, bad news”

  1. Gravatar of David Pinto David Pinto
    20. January 2016 at 11:23

    What happened to the NGDP prediction market widget?

  2. Gravatar of E. Harding E. Harding
    20. January 2016 at 12:17

    David, excellent question. Hadn’t even noticed that.

    “If you can’t embrace contradictions, then you are not a true macroeconomist. (I’m looking at you Bob.)”

    -How serious is this? I’m a little worried about Scott. Not a lot, but definitely a little. First, his bizarre defense of democratic principle while being famous for what he is famous for, now this. Embracing contradictions can be very dangerous.

    And Treasury Secretary’s hardly a meaningless job.

  3. Gravatar of foosion foosion
    20. January 2016 at 13:41

    Why doesn’t the Fed worry that its inability to hit its inflation target does major damage to its credibility? Or does credibility only require raising rates?

    The interest rate on 10-year treasuries has been dropping since the Fed raised. https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=3ciG

    Perhaps the movements in the equity markets will capture their attention.

  4. Gravatar of Gary Anderson Gary Anderson
    20. January 2016 at 13:56

    Foosion, two points about treasuries dropping.

    First is my point, or actually Dr Werner’s point, that demand for bonds as collateral is messing up the traditional function of bonds as a measurement. That increases demand.

    Second is the point from a Talkmarkets contributor, John Thomas, who actually has clients who are in the 1 percent. He makes the claim that they are buying bonds, and they are actually sitting on them in massive amounts, and will continue to sit on them. That is their safety. So that decreases supply.

    Econ 101. Here is his article and people should read it.

    http://www.talkmarkets.com/content/us-markets/the-1-and-the-bond-market?post=83023&uid=4798
    Here is the link to his article:

  5. Gravatar of foosion foosion
    20. January 2016 at 14:17

    Gary, when both equity and debt markets are indicating the same thing, I tend to believe them, even if there are technical considerations, such as those you mention.

    Of course the supply and demand of bonds affects rates. If we believe the market is not giving a valid signal, we might wonder why the 1% have increased their purchases of treasuries and why other market forces don’t counteract them. If the economy were stronger, one might expect increased supply (to finance useful projects) and decreased demand (equities being the traditional alternative when things are going well).

  6. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    20. January 2016 at 14:18

    Prof. Sumner
    If potential holders of T-Bonds, like commenters above said are willing to hold bonds or cash, do you still believe that QE should be executed only with tresuries? Maybe to be more effective, level targeting or not, the monetary authority should buy a certain asset basket that represents fairly the broad asset market, shouldn’t it?

    My point is, a lot of people are skeptical of QE because the people who sell bonds to the Fed will sit on cash, just as they would sit on bonds. And that is it. If they are banks, they might just deposit those reserves with the Fed, and yes, negative IOER might help. But wouldn’t it be better if the Fed just bought directly a wide range of assets ? Maybe effectiveness would be higher.

  7. Gravatar of Kevin Erdmann Kevin Erdmann
    20. January 2016 at 14:21

    Given that corporate operating profits more or less track NGDP over the long term and are a pretty good predictor of short term NGDP shocks, I have a thought experiment for you, Scott. Ignoring the populist outrage it would create, what would happen if the Fed had a policy, instead of buying treasuries, of buying S&P 500 shares, and they announced that they would be targeting the level of the S&P 500 index, with a growth rate of 10% per year. Would anything bad happen? Would this be much different from NGDP level targeting?

  8. Gravatar of Derivs Derivs
    20. January 2016 at 15:13

    “Second is the point from a Talkmarkets contributor, John Thomas”

    Oh good god.. I read his bio and already knew the guy was talkin shit. Just to confirm it I read 1 article and saw the guy knows nothing of what he speaks.

    http://www.madhedgefundtrader.com/a-note-on-the-friday-options-expiration-2/

    “As long as the (SPY) closes at $214.00 or above on Friday, August 21, the position will expire worth $3.00 and you will achieve the maximum possible profit.”

    Actually that should be “at $214.00 or BELOW..”

    “long put position is converted into a large, leveraged outright naked short position in the (SPY) with a cost of $217.50.”

    Nope again, not even close… Using the word “cost” is annoying enough, but you would be short at 214.5 and not 217.5

    “Keep in mind, also, that the liquidity in the options market disappears, and the spreads widen, when a security has only hours, or minutes until expiration. This is known in the trade as the “expiration risk.””

    Nope again… 1-that ain’t what expiration risk is. 2- The options market actually gets incredibly deep moments before expiration particularly in deep in the money options, which are now equivalent to the underlying. So if the underlying is 10.54 at 10.55. You will be like the hot drunk chick at the X-Mas party if you offer a deep in the money call at .53 or bid .56

    Several other “irregularities” of speech not worth mentioning. Although I do give credit to him using a short put spread, as I always said “you can not start teaching someone options by talking about puts, especially shorting them”.

    But no problem, John will sell you his services, and in his own words, “I’m sure you’ll do OK, as long as I am looking over your shoulder, as I will be.”

  9. Gravatar of Derivs Derivs
    20. January 2016 at 15:23

    Kevin,
    Interesting, I would have expected NGDP shock to precede corporate profits. Would also have thought revenue would track better as profits seem more volatile than revenue. Would also think buying up stocks to push up an economy is buying the tail to try to wag the dog. Although the Econ guy from Oxford that looks like the offspring of Ted Kaczynski if he screwed a Billy goat, loves exactly that type of logic.

  10. Gravatar of Gary Anderson Gary Anderson
    20. January 2016 at 16:29

    Derivs said: “Oh good god.. I read his bio and already knew the guy was talkin shit.”

    So you attacked him. Maybe he deserved it. But unfortunately, you didn’t provide any proof that his argument about bond hoarding by the rich was wrong. And I have seen anecdotal evidence that he is right. So, whatcha got? You aren’t trolling me are you?

  11. Gravatar of ssumner ssumner
    20. January 2016 at 16:38

    Everyone, No comments on the fed funds futures? Am I reading that table correctly as below 1% in December 2017? That’s astounding.

    David, Had to take it down, it was causing the site to load too slowly. I put Hypermind in the right column, down under “Sites I Visit”.

    Foosion, Good questions.

    Jose, I’d rather they simply buy Treasuries, I don’t want the Fed speculating in other asset markets, unless the only alternative is fiscal stimulus.

    Kevin, While there is some correlation between stocks and NGDP, lots of other factors are also important in stock prices. Indeed I’d rather they target total labor compensation. If they did target stocks, I’d aim for well below 10% nominal growth.

  12. Gravatar of Gary Anderson Gary Anderson
    20. January 2016 at 16:45

    If we believe the market is not giving a valid signal, we might wonder why the 1% have increased their purchases of treasuries and why other market forces don’t counteract them.

    Other market forces are hoarding bonds too. They aren’t going to counteract these wealthy people: http://www.talkmarkets.com/content/us-markets/fed-weakness-future-insatiable-bond-demand-with-short-supply?post=74137

  13. Gravatar of Derivs Derivs
    20. January 2016 at 16:56

    “So you attacked him. Maybe he deserved it.”

    Dismantled would be more appropriate. Nothing subjective to the argument.

    “you didn’t provide any proof that his argument about bond hoarding by the rich was wrong.”

    Of course not, when I was eleven I learned that rich people buy bonds and shove them in drawers and clip coupons. Have you ever looked at allocations of those funds recommended for people based on their ages??? Truth is I find bonds excruciatingly boring. Some really cool mathy issues and all that stuff, but they move like shit through a constipated sloth!! Just boring.

    You aren’t trolling me are you?
    Actually I am, the Elders assigned you to me.

  14. Gravatar of Benjamin Cole Benjamin Cole
    20. January 2016 at 17:02

    Yes, I will comment on the Fed funds futures market. Scott you are wrong, or limited in your thinking.

    The Fed should have not only not raised rates, it should have gone to about $50 billion a month in QE.

    Yes, the Fed should target NGDPLT. But if they would just hit an IT band of 2.5% to 3.5%, that might obtain the same result.

    Maybe its 1937, or maybe its Japan.

    Yellen and the Fed…are still jibber-jabbering about inflation….

  15. Gravatar of Christian List Christian List
    20. January 2016 at 17:13

    The FED, Merkel, the ECB, together with the Euro, China and the migration crisis, could push Europe further into turmoil. Relevant capitalistic and democratic systems are in danger. The whole world economy is in danger.

  16. Gravatar of Gary Anderson Gary Anderson
    20. January 2016 at 17:31

    I said: “you didn’t provide any proof that his argument about bond hoarding by the rich was wrong.”

    Derives said: Of course not, when I was eleven I learned that rich people buy bonds and shove them in drawers and clip coupons.

    So, Derivs, if you agreed with him what was the point of your criticism. He did, by the way, make another good argument. And that is that the rich are not funding real recovery by just buying bonds. The bonds just stagnate.

    So, Derivs, let me clarify my position, since you have been assigned to me. I believe that all Zionists are globalists. However, it may be true that not all globalists are Zionists. I am thinking about the Pope and his desire to make Jerusalem a United Nations city that makes me think that.

    Zionism is a political cabal, not a religion for those who have not been following. And the Elders paper is not necessary to prove globalist desires for world domination.)

  17. Gravatar of Sam Sam
    20. January 2016 at 17:53

    @Scott,
    I think the Hypermind site was having some problems yesterday but it seems to be working now. I wonder if the widget’s performance problems were just a related, transient issue.

  18. Gravatar of Ray Lopez Ray Lopez
    20. January 2016 at 18:16

    Sumner: “If you can’t embrace contradictions, then you are not a true macroeconomist” – no, you’re a true astrologist.

    And Sumner is embarrassed, after-the-fact, he missed a call to cut rates. Kind of like the armchair trader who, after the fact, ‘knew’ he should have done something in the stock market. Again, evidence that Sumner’s opinion is just ‘noise’, with no predictive power, and Sumner is winging it. But in fairness to Sumner, predicting the economy, using monetary tools or otherwise, is impossible. The annoying thing however is Sumner is too stubborn, or dumb, to know what he doesn’t know, as Socrates once remarked.

  19. Gravatar of Frank Taussig Frank Taussig
    20. January 2016 at 18:36

    Scott, This is not my market and I was not going to chime in but since no one else has, I will say this.

    The operational question to the market is for this product is: What will you pay me right now for 100 dollars of reserves delivered in December of 2017?

    If I think the quoted figure is too low, I get long, if the quote is high to me I get short. This buying and selling reveals where the market thinks the rate is right now. This price discovery is telling you more about the present interest rate environment and watching it move over time tells you where the market thinks it’s headed.

    This is for directional betting. Like if I am long IBM it’s because I think it’s headed up. Do not need to know where to exactly or even when.

    Longs think rates are coming down, shorts think rates are going up

    If you paid 99.125 for 100 bucks in 23 months that implies an overnight effective FF rate of about 40 basis points presently. The current target is 25 to 50 bps , I think the market is telling you we are right where we are supposed to be right now. If the market saw the effective rate at 100 bps in 2017 shorts would overwhelm longs and the price of dec 2017 would be down in the low 98’s right now.

    I don’t work in this market, so do not quote me, but this is what I think you wanted a comment on.

  20. Gravatar of Doug M Doug M
    20. January 2016 at 18:51

    “Everyone, No comments on the fed funds futures? Am I reading that table correctly as below 1% in December 2017? That’s astounding.”

    yes, 0.925 bps for the 12/2017 contract (based on the current price).

  21. Gravatar of Rajat Rajat
    20. January 2016 at 19:36

    “Now it looks like even he was too pessimistic” Optimistic?

  22. Gravatar of Benjamin Cole Benjamin Cole
    20. January 2016 at 19:38

    Spooky question: Okay, let’s say the Fed is wrong, it should not tighten, but rather promote expansion.

    Here is the spooky part: Given institutional and personal inertia that one can never admit being wrong, how long before the Fed/Yellen/Fischer concede they are wrong, and reverse course?

    Will it have to become obvious? Even more obvious, I mean? Will we have to endure recession, before the Fed changes sources? Will there be the requisite amount of harumphing, and pauses, and serious faces?

    BTW, the International Energy Administration just said the oil market will be flooded for next year or two, 1.5 mbd of excess production, and nowhere to put it.

    The auto industry could make about 25% to 30% more cars. Auto prices have not budged in 20 years.

    Commodities are glutted, nearly all manufactured goods markets are satiated, to say the least.

    We have to work on the supply side? Why?

    We have more supply than demand. People all over the world want jobs (except Thailand, they have full employment, but still no inflation).

    If it gets more obvious than this….

  23. Gravatar of E. Harding E. Harding
    20. January 2016 at 20:17

    @ssumner

    -LOL! The Hypermind was causing your site to load slowly? No way. I view this site with AdBlock Plus and never see a problem. It’s the ads. Remove adsonar and investing channel and bring back Hypermind, and you’ve got yourself a fast-loading website.

    “Everyone, No comments on the fed funds futures? Am I reading that table correctly as below 1% in December 2017? That’s astounding.”

    -Everyone has their own guesses about the future, the market has its. The market isn’t always right (e.g., Greece 2009). The market isn’t always wrong, either; otherwise, Communism would have won. I’ll take that 1% into account, but I wouldn’t call it anything near decisive. After some raising and lowering of rates, it’s certainly possible.

    Ben, gluts do not necessarily indicate lack of supply-side problems. Look at Brazil.

  24. Gravatar of Cliff Cliff
    20. January 2016 at 21:13

    Being right doesn’t mean what you think is most likely will happen every time

  25. Gravatar of derivs derivs
    21. January 2016 at 03:05

    “1.5 mbd of excess production, and nowhere to put it.”

    ..See Scott, I reasoned exactly the same thing by only looking at the price change of spreads…

    “Derivs, if you agreed with him what was the point of your criticism. He did, by the way, make another good argument. And that is that the rich are not funding real recovery by just buying bonds. The bonds just stagnate.”

    1- When someone professes to be an expert at something and then is thoroughly discredited at that, I personally do not want to hear anything else from this person that they profess to be an expert at.

    2- If you knew what a bond was you would see the stupidity to his comment. I buy a bond from a company, I am giving them my liquid short term productive assets (cash) in return for an IOU-account receivable. I am not sitting on productive assets, I am sitting on nothing, I gave it away already to be used by someone else who is trying to be productive with it. Sheesh!!

    I wonder if the head of the casino floor just looks out at the floor and cries for mankind.

  26. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    21. January 2016 at 05:08

    @Prof. Sumner
    I get your point about speculation, but after all the Fed is an institution that does not operate based on profit, and has an infinite holding horizon, so, what matters is how effective it is in creating your hot potatoes effect.

    About the Fed Funds futures, indeed they show nobody believes, right now, that they will raise rates that much in the next two years …

  27. Gravatar of Gabe Gabe
    21. January 2016 at 06:25

    why is it shocking that the market expects rates below 1% in Dec 2017?

    do PHD economist not see things like baltic dry index, the oil price, the chinese stock market or the DOW collapsing as everyone panics about a crashing economic system all over the world?

  28. Gravatar of ssumner ssumner
    21. January 2016 at 06:30

    Thanks Sam.

    Doug, Finally! Thanks.

    Rajat, Thanks, I fixed it.

    Cliff, There’s a sense in which that’s true, and a sense in which it is not true. The difference between having the correct model and the correct prediction.

    Thanks Jose.

  29. Gravatar of ssumner ssumner
    21. January 2016 at 06:33

    Gabe, It’s shocking in the sense that it’s so far off what the Fed predicts. Perhaps what I should have said is that the Fed’s view is shocking, given the market forecast.

    Having said that, I still think there’s a slim chance the Fed will be correct, and that we are going through a 1998 moment. But on balance I’d always go with the market forecast.

  30. Gravatar of Njnnja Njnnja
    21. January 2016 at 06:38

    @ ssumner:
    Everyone, No comments on the fed funds futures? Am I reading that table correctly as below 1% in December 2017? That’s astounding.

    FF futures need to be adjusted so you can’t just take 100-rate to get the expected forward rate. I don’t have that for the end of 2017 (ok I’m actually just to lazy to do it right now), but the probability that FF will be greater than 1.0% at the end of 2016 is about 5%. Even just a week ago, that probability was about 15%, and a month ago, it was over 30%. 6 months ago it was almost a 50% chance.

    So your conclusion that the market doesn’t think the Fed is going to be able to raise rates very much any time soon is basically correct, and has been getting more so very quickly. Hopefully the Fed will get the right message from the “red light district” of the equity markets (love that metaphor) and sound the retreat, and make this the 12th of the last 6 recessions that it called, instead of 12 for 7 🙁

    Like ECB did in 2011, and everything turned out alright there, no?

    *sigh*

  31. Gravatar of Gabe Gabe
    21. January 2016 at 06:52

    “what I should have said is that the Fed’s view is shocking, given the market forecast.”

    – ya I agree with this statement…shocking for me to understand what they are thinking….they can’t really be this walled off from reality…they are high IQ people with at least a passing interest in economic data right?

    The main thing i heard the last few months from the”raise rates, the economy is pretty good”-crowd is : look at all the job growth and unemployment rate.

    yet the same people who are so focused on that “positive news” are completely unwilling to talk about the quality of those jobs or the granular details of the employment #’s

    Q:when: did oil prices start falling?
    A:as soon as the FED stopped QE

    and the whole economy has been swirling down the toilet since then…the rate increase was just the last wad of toilet paper getting past the choke point of the toilet…shit is going down now

  32. Gravatar of Cliff Cliff
    21. January 2016 at 08:24

    Scott,

    I just meant that if you predict Hillary will win the presidency with 70% likelihood and she does not win, that does not mean you were wrong. At the time you made you prediction she may very well have had a 70% chance of winning, but sometimes 30% likelihood events happen (often).

    To determine if your predictions are right (in our flawed world) you have to look at a number of your predictions, your % confidence and how well your % confidence reflected the % of each outcome. For any given prediction there is no way to ever be sure.

    Now of course if you predict Hillary WILL win the presidency we can judge that prediction easily but we also know upfront it is a bad one.

  33. Gravatar of E. Harding E. Harding
    21. January 2016 at 09:28

    “Gabe, It’s shocking in the sense that it’s so far off what the Fed predicts. Perhaps what I should have said is that the Fed’s view is shocking, given the market forecast.”

    -That would have been better, as the Fed is basically an isolated committee of experts.

  34. Gravatar of gabe gabe
    21. January 2016 at 09:37

    so when will the next QE or rate decrease be announced? march?

    perhaps answers to this question are best framed in S&P 500 at 1700? 1600? or 1500?( currently 1885)

    It would be interesting to see a poll amongst those who read macroeconomics blogs.

  35. Gravatar of Kevin Erdmann Kevin Erdmann
    21. January 2016 at 12:00

    If you don’t mind, Scott, I will push some more on this S&P500 idea. I might have aimed a little high. Maybe 8% is better, but in an age of stock buybacks, the indexes are biased upward by 2% or so, by return of capital that is treated like a capital gain. So, 7-8% stock price index target is similar to a 5% NGDP target, I think. Some equity value is from global revenues, but that may be more of a feature than a bug.

    In a lot of ways, I think it is better than NDGP as a proxy for compensation stability. It also appears to be a slightly leading indicator for NGDP changes. I think stock prices mostly are a function of NGDP shocks and long term RGDP expectations, and that changing discount rates are way over estimated, although I know I’m not in the mainstream on that.

    But, in a way, when you are begging for an NGDP futures market, you have one already – the stock market. And, it doesn’t have any problems of estimation or revisions. Each day there is a very precise emergent value that will not be revised.

    Here is a long term comparison (Here I use nonfinancial corporate equity values, which track the S&P500 very closely and go back farther in the Fred database.)
    https://research.stlouisfed.org/fred2/graph/?g=3cVf

    And, I think it is worth thinking about a capital market where we have entirely removed cyclical price risk. What would happen? I think it would be mean reverting. I don’t think it would lead to some sort of unstable equilibrium.

    There would still be risk in individual investments, but thinking with a CAPM framework, this would basically remove undiversifiable market risk from equity markets, which is the main source of at-risk capital income. This would create a context, on the savings side, where there would be very little demand for fixed income. Interest rates would be much higher. And, I’m not so sure those higher rates wouldn’t somehow be related to high real growth rates.

  36. Gravatar of bill bill
    21. January 2016 at 16:12

    @Kevin Erdmann:
    I think that if the Fed started to target the S&P 500, then the risk profile would change, so after a large one time jump, I think the growth rate would be the same as the growth of NGDP. And that would be one big one time jump.

  37. Gravatar of ssumner ssumner
    21. January 2016 at 17:33

    Thanks Njnnja.

    Gabe, Let’s hope it doesn’t get that bad; I still have an open mind on what we’ll get in 2016.

    Cliff, Yes, I did get your point. My point is that the term ‘wrong’ can be defined in two different ways, and neither definition is “wrong.” 🙂

    Kevin, You said:

    “But, in a way, when you are begging for an NGDP futures market, you have one already – the stock market.”

    So when stocks crashed 40% in late 1987, what was that telling us about NGDP growth expectations?

    I do see your point, and I can see how it might possibly work. But it’s taking a big risk, and NGDP futures are the much safer way to go.

    And don’t try to sell your idea in Beijing right now. 🙂

  38. Gravatar of Kevin Erdmann Kevin Erdmann
    21. January 2016 at 18:45

    1987 is an interesting example. On the one hand I have a hard time coming up with a GDP correlation there. On the other hand, the alternate 1987 where the Fed says S&p500 will be 340 on October 31 seems like a point in favor of equity level targeting. 😉

    It would require liberalized capital markets, which is probably why it wouldn’t work in China, and why ad hoc de facto housing price targeting didn’t work for the US in 2007.

    Bill, you’re probably a little right, but I suspect it would lower bond prices as much as it would raise equity prices.

  39. Gravatar of Liberal Roman Liberal Roman
    21. January 2016 at 21:58

    This whole thing is a tragedy playing out in front of us for the past 7 years now…God why couldn’t we just get Summers. We would have bitched about him and been cynical and then be pleasantly surprised. Instead we had the politically safe Yellen pick, who is just a disaster.

    By the way, Obama is now actively appointing open hawks to the Fed board with Kashkari being the latest. I don’t even think he is doing this knowingly. I honestly believes he puts no importance or thought into the Fed and thinks of Fed governorship equivalent to ambassadorships to random 3rd world countries. Just prizes to give out to favorites.

  40. Gravatar of Julius Probst Julius Probst
    21. January 2016 at 23:12

    Another extremely good comment by Kocherlakota. He argues that the FED should make a hard U-turn and reverse policy, given where we are right now with rapidly falling inflation expectations.
    https://sites.google.com/site/kocherlakota009/home/policy/thoughts-on-policy/1-21-16
    I seem to remember that the hypermind prediction market predicted a more than 4% increase in NGDP for 2015 as of last summer whereas we are now at 3%. Extremely unfortunate that one of the few persons at the FED who seems to understand what’s going on is not even on the FOMC anymore.
    His extremely bearish forecasts will now be vindicated. I guess that the probability of a US recession in 2016 has increased quite dramatically over the last couple of months. Obviously, it will all depend on the reaction function of the FED.

  41. Gravatar of derivs derivs
    22. January 2016 at 02:16

    The market may move as a function of GDP but no way can you make that the other way around. You would just be pushing out P/E ratios. Maybe they buy all companies products and overpay as well, then you can have higher revenues and spectacular earnings. Let’s just propose a floor on earnings!!! Then no companies would ever go bankrupt, need to waste money in R+D and new products, and no one will ever lose their job.

  42. Gravatar of ssumner ssumner
    22. January 2016 at 17:42

    Liberal, He’s not an Obama appointee, is he?

    Thanks Julius, I did a post.

  43. Gravatar of Kevin Erdmann Kevin Erdmann
    23. January 2016 at 13:29

    Derivs, you are confusing idiosyncratic risk and systemic risk. Totally different things. If you don’t think the Fed’s job, done well, should preferably lead to fairly stable aggregate earnings, then we might as well have a dart throwing monkey for monetary policy. At least then instability would only be random error and not a policy choice.

  44. Gravatar of Major.Freedom Major.Freedom
    24. January 2016 at 17:34

    “The good news is that the Fed is unlikely to raise rates in the near future. The bad news is that the Fed is unlikely to raise rates in the near future. How can two mutually exclusive claims both be true? If you can’t embrace contradictions, then you are not a true macroeconomist.

    It is not a contradiction to say there is both good news and bad news from a particular fact.

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