What’s the problem?

The problem isn’t the recent decline in equity prices; the stock market tends to be more volatile than the underlying economy.  Nor is it the recent increase in the fed funds rates (2.4% isn’t very high in an economy growing at 5.5% in nominal terms.)  Rather, the problem is two-fold:

1. Unrealistic forward guidance, which ignores market forecasts.

2. Too much inertia in adjustments in the fed funds rate.

Elsewhere I’ve argued that the second factor may explain the strange absence of mini-recessions in postwar US history.  And this absence is really, really strange.  Just imagine how perplexed geologists would be if the Earth had no small earthquakes, only large ones.  What model could possible explain that? I’ve argued that the sluggishness in the response of interest rates might explain why it is that when we start to slide into a recession we never seem to stop halfway, with the unemployment rate rising by only 0.9 to 2.0 percentage points.

The fed funds rate is currently around 2.4%, and the market forecasts a rate of 2.3% out in July 2020.  That forecast is down sharply in recent months, although still not in recession territory.  Unfortunately, the Fed is forecasting two rate increases next year, and the markets seemed to react poorly to Powell’s attempt to explain this forward guidance.  Even worse, the Fed is often reluctant to change course, because of a perception that it reduces credibility.  Just the opposite is true.  The credibility that matters is the Fed hitting its macro targets, not its interest rate forecasts.

Earlier I suggested the following reform:  Each day, have every FOMC member email their preferred IOR rate, calculated to the nearest basis point.  Set the IOR at the median vote.  Tell the market that the rate will likely follow something close to a random walk, with an increase on one day often followed by a decrease the next.

Looking further ahead, my preference would be to have the Fed entirely cease its targeting of interest rates and let the market determine the appropriate rates.  Instead, the Fed would give the New York open market desk the following instructions:

1.  A range for one year NGDP growth–say 3.5% to 4.5%.

2.  Instructions for the New York Fed to take unlimited short positions on NGDP futures contracts at 4.5% and unlimited long positions at 3.5%.

3.  Instructions to do open market purchases and sales (with Treasury securities) in such a way as to avoid losses in their trading of NGDP futures contracts.

That’s all.  Let the market set interest rates; they are much better able to determine the appropriate fed funds rate.

OK Fed, you’ve got a landing. Now let’s make it “soft”.

PS.  As I contemplate the Fed’s current (flawed) policy regime, I feel sad and blue:

Screen Shot 2018-12-25 at 12.59.20 PMTyler Cowen recently linked to an article on the Chinese industry of copying famous oil paintings. This is a detail from an oil painting I purchased in China, for about $15 dollars.  It hangs in my office.  In downtown LA, people spend thousands on paintings by hip new artists.  I can get better art in China for a tiny fraction of the price. You might argue that they aren’t really buying art, they are buying a story.  And “I support hip young artists” is more appealing than “I buy Chinese knockoffs of famous paintings.”  Fortunately, I don’t care what other people think of my taste in art.

Merry Xmas and Happy New Year

PPS.  You want a Christmas theme?  Here’s an even better painting (by Titian), recently restored to its former glory:

Screen Shot 2018-12-25 at 3.54.49 PM

 

 

 

 


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53 Responses to “What’s the problem?”

  1. Gravatar of dtoh dtoh
    25. December 2018 at 13:13

    Scott,

    Louder please! Much louder!!!!!!

  2. Gravatar of Kgaard Kgaard
    25. December 2018 at 14:12

    Thank you for this Scott … You are the first person on the anti-Trump left (or center left) to put the blame where it belongs: On the Fed’s blatant dismissal of the message of futures markets: the 5-year CPI breakeven and 10-year Treasury yield.

    To investors (especially overseas investors) the motivation for the Fed’s hike must have appeared puzzling if not sinister: The FOMC threw common sense — and its own rulebook — out the window as part of a quest to undermine the Trump economy. It doesn’t help to see Bloomberg, NYT and WP all running interference for Powell despite what was obviously an erroneous decision.

    Even KRUGMAN refused to criticize the hike in his column yesterday. That tells you he is more committed to undermining Trump than supporting proper, rules-based monetary policy.

  3. Gravatar of ssumner ssumner
    25. December 2018 at 16:11

    Kgaard, You said:

    “Thank you for this Scott … You are the first person on the anti-Trump left (or center left) to put the blame where it belongs: On the Fed’s blatant dismissal of the message of futures markets: the 5-year CPI breakeven and 10-year Treasury yield.”

    Actually, I did not do that.

    You said:

    “out the window as part of a quest to undermine the Trump economy.”

    So let me get this right. When Trump said he would appoint the “best people” he meant the people who would undermine his economy? That doesn’t sound very smart, and yet Trump insists he’s a genius. I wonder if he actually is?

    Sometimes I wonder if Trump supporters are serious, or just pretending to look foolish.

    In fact, if you reread this post it’s not about Powell, or Yellen, or Bernanke, or Greenspan. IT’S THE REGIME STUPID.

  4. Gravatar of Benjamin Cole Benjamin Cole
    25. December 2018 at 16:27

    Excellent blogging. Perhaps NGDPLT 4.5% to 5.5% is safer… Also, the 1990s expansion for just that long recoveries start to lead to higher productivity rates. Thus we can have a higher NGDPLT but keep inflation towards the sacred 2% level.

    I spent decades in utter bewilderment at the Los Angeles art scene. All the economic arguments about rational man are destroyed.

    Was it the Potlatch tribes in aboriginal North America where material items were set to bonfires in a display of wealth?

    Happy holidays all!

  5. Gravatar of Ram Ram
    25. December 2018 at 17:30

    This really does seem to be a case where futures targeting is just what the doctor ordered. Since early October, stocks have been sliding, the dollar has been appreciating, the TIPS spread has been tightening, the yield curve has been flattening, fed funds futures have been sinking, and the price of oil has been tanking. The financial markets have clearly been signaling that monetary policy is getting too tight. If the Fed had signaled it was directly responding to that last week, we’d have a circularity problem. But by not fully responding to it, they made monetary policy still tighter, accelerating all of these trends. There isn’t really a way out of that bind besides futures targeting. Powell was trying to thread the needle by saying we’re slowing the pace of rate hikes based on the incoming data, and will continue to monitor the incoming data, but not because we’re inferring anything from market movements. The market read that as the Fed waiting for a recession before it course-corrects, which is leading it to price in a higher probability of recession. Futures targeting is the only way I can see to avoid situations like this. I suspect this is becoming more of a problem over time due to the secular decline in interest rates, since the fear of recession increasingly means the fear of another ZLB episode. This is likely why the lack of a futures targeting regime is creating more volatility. Further away from the ZLB things might be less volatile.

    Merry Christmas.

  6. Gravatar of Kgaard Kgaard
    25. December 2018 at 19:00

    Scott … Well it seems pretty clear to me that a central banker would have had plenty of leeway to justify not hiking last week within the current regime. He/she just could have said “futures are signaling pretty substantial declines in economic activity and CPI, and thus we’re going to wait.”

    As for Trump appointing the best people, well hiring is difficult. The real issue here is … Why can’t the president fire the Fed chair in the first place, since he can fire every other appointee except judges? What makes the FOMC chair so special?

    The obvious answer (correctly me if I’m wrong), is that the globalist elite demand control over central banking. That is why Bloomberg, NYT and WP are all going epileptic in their defense of Powell, and why Krugman has gone (again) into full-on hypocrite mode.

  7. Gravatar of Philip Crawford Philip Crawford
    25. December 2018 at 19:31

    Hey Scott,

    The last time you posted about a lack on mini-recessions, I commented with a link about the difference between the San Andreas fault and the Cascadia subduction zone, which has less small earthquakes, but has had some absolutely enormous ones in the past.

    https://www.themoneyillusion.com/dont-expect-the-future-to-be-like-the-past/#comment-2772931

  8. Gravatar of Steve Steve
    25. December 2018 at 20:19

    Lawrence H. Summers
    @LHSummers

    The Fed is taking needless risks with the economy. Neither price nor financial stability required yesterday’s actions.

    6:55 AM – 20 Dec 2018

  9. Gravatar of Scott Sumner Scott Sumner
    25. December 2018 at 20:39

    Ram, Yes, futures targeting is a no-brainer.

    Kgaard, You said:

    “The real issue here is … Why can’t the president fire the Fed chair in the first place, since he can fire every other appointee except judges? What makes the FOMC chair so special?”

    No, the real issue is why did Trump fire Yellen (who was doing a great job) and appoint someone that every single person knew had been more hawkish, and then complain that he is too hawkish?

    Philip, But even the Cascadia region has some smaller earthquakes, doesn’t it?

  10. Gravatar of dtoh dtoh
    25. December 2018 at 21:22

    > IT’S THE REGIME STUPID.

    No. No. NO!!!!

    When you’re below your inflation target and the markets are screaming that both inflation and output are going to drop, and then you raise rates and say you’re going to raise them further…twice, it’s has nothing to do with regime….. it’s pure stupid moronic incompetence.

    Powell was a terrible appointment. Trump should fire him!!!!

    How can this not be obvious to any sentient being????

    Stop giving the Fed a pass. Potentially millions of jobs and a trillion in output. Really? Seriously? Why aren’t you screaming?

  11. Gravatar of Jg Jg
    25. December 2018 at 22:02

    Excellent Christmas painting!

  12. Gravatar of Benjamin Cole Benjamin Cole
    26. December 2018 at 04:49

    I do not always agree with dtoh, but he is right. Larry Summers says so too.

    “Stop giving the Fed a pass. Potentially millions of jobs and a trillion in output. Really? Seriously? Why aren’t you screaming?”–dtoh

    Maybe this would be better in all caps.

  13. Gravatar of Plato’s Revenge Plato’s Revenge
    26. December 2018 at 05:15

    Prof. Sumner, aren’t you subtly changing the subject? Kgaard says everybody is trying to bring down Trump (via Fed). You answer that he brought it on himself

    Now I don’t agree with Kgaard on this — the Fed has behaved like this for ten years now — but the kick against Trump, even if it feels good momentarily, places you right among those personalizing and politicizing monetary policy

    I’ve always read you as blaming monetary policy as an equal opportunity offender, killing left and right alike

  14. Gravatar of bill bill
    26. December 2018 at 06:31

    But isn’t 4th quarter NGDP growth more like 4%? And it looks like the markets expect Q1-2019 NGDP to be slower than that (but I really don’t know that, of course).

  15. Gravatar of Kgaard Kgaard
    26. December 2018 at 08:04

    Scott … Yes I agree. He should not have fired Yellen.

  16. Gravatar of Philip Crawford Philip Crawford
    26. December 2018 at 08:49

    Scott,

    Yes, Cascadia area has some seismic activity, but those aren’t viewed as a subduction earthquakes.

    https://theconversation.com/parts-of-the-pacific-northwests-cascadia-fault-are-more-seismically-active-than-others-new-imaging-data-suggests-why-100631

    Think of this area as being very good at converting kinetic energy (which is bad) into potential energy. Other areas such as California don’t have the ability to absorb so much kinetic energy before releasing it, so the earthquakes are more frequent and smaller.

    Maybe the modern US economy just has a better ability to absorb negative energy for a longer duration, but there are limits?

  17. Gravatar of J Mann J Mann
    26. December 2018 at 09:32

    Surely there’s room for Scott and dtoh to both be right. Powell shouldn’t be tightening the screws right now, it’s going to hurt Trump, and it’s largely Trump’s fault for hiring a guy who would predictably do exactly this in this situation.

  18. Gravatar of Brian Donohue Brian Donohue
    26. December 2018 at 10:57

    Well, the first sign is acknowledging there is a problem, so, good.

    Long-term regime change is always a good topic, but a focus on concrete policy guidance over the next six months is crucial right now. I look forward to some good and important blogging.

  19. Gravatar of Brian Donohue Brian Donohue
    26. December 2018 at 10:57

    Well, the first sign is acknowledging there is a problem, so, good.

    Long-term regime change is always a good topic, but a focus on concrete policy guidance over the next six months is crucial right now. I look forward to some good and important blogging.

  20. Gravatar of msgkings msgkings
    26. December 2018 at 13:47

    @J Mann: exactly, yep. I would say ‘what did Trump think was going to happen switching from Yellen to Powell?’ but of course he doesn’t think things through like that.

    Whatever Trump is good at, thinking ain’t it.

  21. Gravatar of Scott Sumner Scott Sumner
    26. December 2018 at 20:35

    dtoh, Trump picked Powell. If Powell is as incompetent as you suggest (which I doubt) then it would be a disaster to have Trump pick someone else. He’s already showed himself to be unable to pick competent people, for almost any position. The people he picks he latter fires, and then he insists they are morons. Well here’s my question to Trump: “If they really are morons, why did you pick them.”

    I still haven’t heard a good answer.

    We all knew that Powell was slightly more hawkish than Yellen—so exactly what is the problem? If anything, Powell has been more dovish than I expected—NGDP growth is faster under Powell than Yellen.

  22. Gravatar of Scott Sumner Scott Sumner
    26. December 2018 at 20:39

    Plato, I agree with you, it’s an equal opportunity offender. I’d rather leave Trump out of this; it’s others who idiotically claim that the Fed is sabotaging Trump, when “The Fed” is basically a bunch of Trump appointees.

    So by all means criticize the Fed, but please don’t use it as an excuse for Trump’s problems, or suggest that Trump is “right” about monetary policy, which is like saying a broken clock is right twice a day. So what?

  23. Gravatar of Scott Sumner Scott Sumner
    26. December 2018 at 20:46

    Brian, We keep appointing extremely competent people to the Fed, and then continually call them idiots when they screw up. When will we learn that it’s the regime? I can’t imagine how anyone could think new people would solve the problem, when we clearly need a new regime.

    In 1999, Bernanke wrote a brilliant MM-style critique of the BOJ.

  24. Gravatar of XVO XVO
    26. December 2018 at 21:49

    “When will we learn that it’s the regime? I can’t imagine how anyone could think new people would solve the problem, when we clearly need a new regime.”

    But aren’t the people that make up the regime, the regime?! They can change the regime if they want, or if they don’t have the power they can publicize what they would like to change. Couldn’t the fed make an NGDP futures market, declare that NGDP targeting is the best way to achieve the dual mandate, and start doing NGDP targeting?

  25. Gravatar of dtoh dtoh
    27. December 2018 at 01:19

    Scott,
    1. “The Fed is basically a bunch of Trump appointees.” Really? 2 out of 12 FOMC members were appointed by Trump.

    2. Who is claiming the “Fed is sabotaging Trump?”

    3. When has anyone thought the President was competent to pick a Fed Chair. It’s always been basically a coin toss between a couple of names that have the support of the banking/academic world.

    4. Trump is right about monetary policy (probably for the reason you state,) but that doesn’t change the fact that he is right, and it shouldn’t be a reason for those affected by TDS to make apologies for the Fed.

    5. “We keep appointing competent people to the Fed.” NO. NO. NO. Bernanke was a competent academic. He was an extremely incompetent Fed Chair. Huge difference.

    6. XVO is right. The Fed can change the regime. They could do it in 30 seconds at 9am tomorrow morning.

    7. The problem is that professional economists keep giving the Fed a pass or at most offering milquetoast criticism.

    8. “Powell has been more dovish than I expected—NGDP growth is faster under Powell than Yellen.” It’s not because Powell is more dovish, it’s because you underestimated the effect of the tax cut and the impact of the the low LFPR.

    9. “If Powell is as incompetent as you suggest (which I doubt)..” What possible grounds do you have for doubting it? Do you no longer believe in the EMH and think the market is sending incorrect signals.

  26. Gravatar of Benjamin Cole Benjamin Cole
    27. December 2018 at 02:13

    OT–

    Mainland China has become an increasingly repressive authoritarian state, accelerating in recent years. Many NGOs, think tanks, media outlets etc kicked out, or silenced. Increasing Communist Party of China presence in private and state-owned firms. A surveillance state on steroids, thanks to technology.

    Now this:

    “China’s cyber watchdog has issued new regulations for domestic financial information providers, in an apparent crackdown on online content deemed detrimental to the country’s financial stability, as the economy slows.

    Financial information providers are now not allowed to distort Chinese fiscal and monetary policies, disturb economic order or to harm the nation’s interests, the Cyberspace Administration of China (CAC) said on Wednesday.

    Service providers being targeted include those involved in financial analysis, financial trading and financial decision-making, but do not include foreign wire services, according to the CAC.”

    —30—

    Really, is China the sort of place to invest money?

    If China is a “good investment,” what does that say about libertarian, or even free-market philosophies?

  27. Gravatar of Mark Mark
    27. December 2018 at 05:37

    China’s authoritarianism is reflected in the market through lower prices for Chinese assets. Publicly traded stocks in China (including Hong Kong) trade at a significantly lower multiple of earnings than US stocks even though China is growing faster, and US companies on average earn 20%+ returns on their Chinese direct investments to compensate them for the risk. The free market is working well here; the Chinese pay for their government’s authoritarianism through their assets being worth less and having to pay out more to foreign investors.

  28. Gravatar of Michael Sandifer Michael Sandifer
    27. December 2018 at 06:53

    Scott,

    You wrote: “Brian, We keep appointing extremely competent people to the Fed, and then continually call them idiots when they screw up. When will we learn that it’s the regime? I can’t imagine how anyone could think new people would solve the problem, when we clearly need a new regime.”

    Exactly. By its very nature, an IT regime will tighten money in response to real shocks.

    This is part of what we’re seeing in markets now. Real shocks related to trade restrictions, falling AD abroad, government shutdowns, etc. are increasing the demand for dollars. Under a credible NGDPLT regime, presumably there’d be little or no increase for money demand in situations like this.

  29. Gravatar of Brian Donohue Brian Donohue
    27. December 2018 at 08:13

    Scott,

    And yet we have had bouts, nay decades, of competent Fed management in the current regime, punctuated by one grievous mistake. Are we gonna get your desired regime in the next six months? No.

    So continue proselytizing by all means but keep your eye on the ball too.

    Happy new year!

  30. Gravatar of Brian Donohue Brian Donohue
    27. December 2018 at 08:31

    Scott,

    I noticed that in the latest hated “box plot” the Fed’s median long-term target is now 2.75%. Back in 2013, it was 4%. Encouraging.

    This seems consistent with the “new normal” hypotheses, which has obtained throughout the recovery.

    On August 2, 2011, the 30-year Treasury yield fell below 4%, closing at 3.93%. In the 7+ years since, it has never breached 4%, the average yield has been 3.03%, and yesterday’s close was 3.06%. We have arrived. Let it sink in.

    Maybe room for one more hike next year by the Fed’s own box plot logic. I’d gladly take the under on 1.5 hikes next year if you’re interested in a flutter.

  31. Gravatar of Doug M Doug M
    27. December 2018 at 13:06

    “Elsewhere I’ve argued that the second factor may explain the strange absence of mini-recessions in postwar US history. And this absence is really, really strange. Just imagine how perplexed geologists would be if the Earth had no small earthquakes, only large ones. What model could possible explain that?”

    Why are there no mini-avelanches?
    Or small nuclear explosions?

    Catastrophe Theory is the branch of mathematics that discusses dynamic systems with stable and unstable equilibria that appear and disappear with small changes in parameters.

    https://en.wikipedia.org/wiki/Catastrophe_theory

  32. Gravatar of Christian List Christian List
    27. December 2018 at 14:31

    We keep appointing extremely competent people to the Fed, and then continually call them idiots when they screw up. When will we learn that it’s the regime?

    Scott,

    sorry, I assume it’s my “lazy thinking” again but I don’t get your point at all.

    Why do you think they are extremely competent in the first place? What makes them so competent? That they screw up? That they don’t realize that they use the wrong regime? What in the world is it?

    All the points you have described define pure incompetence.

    And btw: Stop blaming the mistake on the “wrong regime”. They are the regime.

  33. Gravatar of mbka mbka
    27. December 2018 at 18:48

    Doug M,

    catastrophe theory – and more specifically, the branch on avalanches explored in criticality, would lead us to expect a power law distribution for those catastrophes (earthquakes, avalanches, economic crises…): very few large ones, many small ones, with exponential decay in frequency (hence, “power law”).

    This supports what Scott said – why no small crises (in the general case)? One possibility is the successful suppression of small catastrophes – in other words, small instabilities are papered over, and now only the big ones come through. The resulting large catastrophes are now more unexpected (no warnings) and possibly larger (small catastrophes would have released some of the tension, which now only releases in larger chunks). This also happens in earthquakes btw – the size distribution is a statistical average, but it does happen that long lulls are followed by large quakes.

    The most intriguing analogy to economics is from ecology, however. In the early 20th Century, US National Park successfully suppressed wildfires. Or so it was thought. At some point however people realized that the suppression of many smaller fires only led to accumulation of undergrowth. That kind of fuel accumulation would eventually result in uncontrollable, much larger fires. So there was a change in thinking about letting small fires go through in the US National Park Service, though interestingly, the US Forest service still appears to have a zero fires policy.

    This field has a lot of possible implications for economics IMO and has been hugely under-explored in that context. Two possible lessons, let the small fires burn in a controllable fashion to release accumulated imbalances, or even create controlled fires (this too is done in forest ecology), and, from self-organized criticality we know that large avalanches can be triggered by unremarkable smaller local collapses.

    For more, read the works of Per Bak, or google “self-organized criticality”.

  34. Gravatar of ssumner ssumner
    27. December 2018 at 21:49

    Everyone, Trump can’t possibly be “right about monetary policy”, as he doesn’t know what monetary policy is. People think Trump is offering an opinion on monetary policy, but he is not. He says he’s a low interest rate guy, but what does that even mean? I suppose it might mean that he’d like a Japanese style monetary policy, with very low rates forever. Is that what his supporters think he means? Is that easy money?

    He thought money was too easy in 2016, when it was actually too tight.

    Once a person tries to figure out what Trump actually believes one quickly discovers that he doesn’t even know enough to have coherent beliefs. He thinks low interest rates are easy money, which of course is nonsense.

    dtoh, Trump picked Powell as chair, Clarida as vice chair, and Quarles as the top regulation person. Several seats on the Board are empty. So it’s a fact that Trump appointees basically run the Board.

    He’s not smart enough to know what he’s doing when making appointments to any position, including the Fed. The problem is that Trump’s too dumb to realize that he’s in way over his head, and doesn’t have a clue as to what he’s doing. Putting pressure on the Fed to not raise rates makes it more likely they will raise rates. Anyone who is good at “negotiating deals” would know at least that much, but Trump doesn’t know even the most basic principles of negotiation.

    Christian, You said:

    “They are the regime.”

    I’m guessing you don’t know what the term means.

  35. Gravatar of Christian List Christian List
    28. December 2018 at 00:52

    Scott,

    I know exactly what the term means. I think, I made clear what I mean: If they were so super-competent as you say, they would clearly try to change a procedure that is not working. But they don’t even get that the procedure is not working.

    So, firstly, they aren’t as competent as you say, and secondly, “they are the procedure”, meaning they don’t see problem; meaning you can’t separate them from the procedure; meaning they are the other side of same coin; meaning they are the problem.

    I assume you don’t attack them for “diplomatic” reasons. Phrasing it this why might be more clever. “Look it’s the procedure, you guys are all geniuses” is smarter than “You idiots don’t even get the problem”.

  36. Gravatar of Justin Justin
    28. December 2018 at 06:38

    “2. Too much inertia in adjustments in the fed funds rate.”

    This has bothered me for a while. Why does the Fed have to change rates in multiples of 25bps, and (more or less) only during pre-set meetings? Why does the Fed have to have rates either in a consistent string of increases of a consistent string of decreases? The real economy isn’t going to behave like that in terms of what the appropriate interest rate is.

    Scott, I like your idea of setting IOR on a daily basis based on the midpoint of a survey.

    Another possibility would be to target 5yr breakeven inflation so that it’s in a range between 1.8% and 2.2%. If it falls to, say, 1.76%, the Fed buys bonds until it rises back above 1.8%, and if it rises to 2.27%, it sells bonds until it falls back below 2.2%. It would be less radical of a change than an NGDP target.

  37. Gravatar of mbka mbka
    28. December 2018 at 07:16

    Christian List,

    as far as I know, the regime in the US is partially dictated by a congressional dual mandate to target both employment and inflation. As long as inflation is a mandated target, the regime can’t deviate too much from current practice, no matter who is in charge at the Fed.

    Now, how to change the congressional mandate, that’s another matter. Maybe think tank recommendations (hint, hint!) or recommendations from past Fed appointees would help. Recommendations are unlikely to be made by current Fed appointees for obvious political dilemmas.

  38. Gravatar of anon/portly anon/portly
    28. December 2018 at 10:21

    The DJIA is currently 23186.

    On December 29, 2017 it was 24719.

    On December 30, 2016 it was 19763.

    On December 31, 2015 it was 17425.

    On December 31, 2014 it was 17823.

    On December 31, 2013 it was 16577.

    Over the last year, it’s down about 6.2%. Over the past two years it’s up 8.3% per year. Over the past three years it’s up 10.0% per year. Over the past four years it’s up 6.8% per year. Over the past five years it’s up 6.9% per year.

    Well, since the DJIA has only been rising at a 6.9% pace over the past five years, clearly the markets must be signaling whatever the highly esteemed commenters above are implying it/they is/are signaling, so I am definitely in a state of panic myself. This is my farewell comment, as even as I type this comment I am throwing myself out of a win

  39. Gravatar of Carl Carl
    28. December 2018 at 13:11

    This sounds like Austrian Business Cycle Theory to me.

  40. Gravatar of ssumner ssumner
    29. December 2018 at 08:10

    Doug, Are there mini nuclear explosions in Australia? The UK? Because they have mini-recessions.

    Christian, You said:

    “I assume you don’t attack them for “diplomatic” reasons.”

    I assume you are new to this blog, as I attacked the Fed relentlessly during 2008-14. Either that or you are very forgetful.

    I don’t attack them because inflation is 2% and unemployment is 3.7%. So they are hitting their targets. I may prefer NGDP, but that’s their target. In 2008-13 they were not hitting their targets.

    Anon/Portly, Good comment.

  41. Gravatar of Mike Sax Mike Sax
    31. December 2018 at 14:10

    Merry Chriistmas and Happy New Years.

    Here is what Angry WH Staffer says GOP Senators say about him behind closed doors:

    “Do you see a shifting away from Trump in the GOP? Can they not see the damage he is doing? Do you have insight into what they are saying behind closed doors?”

    “This is a great question, and a topic that irritates me greatly. Almost without exception, the people who defend Trump in public slander him mercilessly behind closed-doors. It’s hypocrisy on a scale that you probably won’t find many places outside of DC. They all know he’s an idiot. They all know he’s bad for the GOP brand (and the country). There really aren’t many people in Congress who actually like Trump, outside of Meadows, Gaetz, and a couple of outliers. It’s a not-so-well kept secret that McConnell and Murdoch met to discuss their exit strategy. I would have expected to see more public deployment of it already, but I don’t think it will be long; the shutdown is not playing well for the GOP with pollsters. It’s almost like blaming the Democrats for a shutdown when you control the entire government was a bad idea. Weird, huh?”

    http://angrystaffer.blogspot.com/2018/12/twitter-questions_29.html

    Here are his predictions on impeachment:

    Many of you have asked me which Senators I think will defect and vote for conviction after the House impeaches. Here’s a list of my best guesses with the information available at this time:

    Couple of notes before we start: this exercise assumes a few things:

    1. all Democrats will vote to convict.
    2. it will happen in the next (116th) Congress that starts on January 3rd, 2019, so I have not listed any retiring members here.
    3. I am also listing both independents as YES votes, but that seems to be all but guaranteed. So we need 20 R’s to vote for impeachment.

    I still fully believe that as information continues to come out (we haven’t even gotten to the really good stuff yet), we will see a mass-exodus from Trump in an attempt to save 2020. Far too little, way too late, but I expect for it to happen. I don’t think Trump will actually be removed from Office via impeachment, but I do believe the public whip counts will scare the crap out of him and he’ll end up resigning. At least if he resigns, he can do it on his own terms (ish) and spin it the way he wants… until he ends up in prison.

    http://angrystaffer.blogspot.com/2018/12/angrys-impeachment-prediction.html

  42. Gravatar of Willy2 Willy2
    1. January 2019 at 09:46

    – The FED FOLLOWS the 3 month t-bill rate and that rate seems to be turning a corner (lower) right now.
    – Two articles on the topic “Australia”:
    1) Even the OECD is worried about the australian housing market:
    https://wolfstreet.com/2018/12/10/severe-collapse-of-home-prices-might-trigger-a-financial-institution-crisis-in-australia-oecd-frets-about-the-banks/
    (with a link to the Original document of the OECD)

    When even the OECD get worried then something is REALLY wrong. Keep in mind: the OECD didn’t forsee the financial crisis of 2008 !!

    2) “Aussie house price crash accelerates into 2019”. December 2018 recorded the largest drop in house prices in the five largest australian cities.
    https://www.macrobusiness.com.au/2019/01/aussie-house-price-crash-accelerates-2019/

    The article has DATA and charts based on data from Corelogic, a company that tracks price movements in the real estate market(s) of Australia. Still not convinced “something is wrong” in Australia ??.

    – Steve Keen has used his favourite formula and draws the conclusion that Australia is currently already in “a recession”. But the country is not yet in a depression. And Steve Keen looks at the amount and change in credit & income.
    – Steve Keen has noted that Australia went into a recession in november 2007.
    – Forget what the Econimist has said about Australia. That article was based on data up to late 2016/early 2017. and since then the australian real estate markets have changed course. The info published above is from december 2018.

  43. Gravatar of ssumner ssumner
    1. January 2019 at 11:33

    Willy2, Keep making those predictions—Someday there will be a recession in Australia.

  44. Gravatar of Willy2 Willy2
    1. January 2019 at 23:05

    – Australia is ALREADY in a recession but it seems that one Scott Sumner is extremely unwilling to admit that he didn’t study the work of Steve Keen.
    – Just make some time available and read the weblinks I provided above.
    – There was a german physicist called Max Planck and he made one statement that I am remembered of when I hear one Scott Sumner say Australia is NOT in a recesssion:

    “Science advances one funeral at a time” (Max Planck, 1858-1947). And it seems one Scott Sumner must die before he is willing to admit Australia is in a recession. and that his ludricous views on economics are obsolete.

    https://en.wikiquote.org/wiki/Max_Planck
    https://en.wikipedia.org/wiki/Max_Planck

  45. Gravatar of Willy2 Willy2
    2. January 2019 at 07:41

    – Or read this article fromk Bloomberg: “Sydney’s Housing Slump Deepens As Prices Drop Most since 1980s”. Cause of the downturn: tighter credit standards.

    https://www.bloomberg.com/news/articles/2019-01-01/sydney-housing-slump-to-deepen-as-prices-drop-most-since-1980s

    – Australian vehicle sales down 7.8% and passenger car sales down 20% in the 12 months between june 2017 and july 2018
    https://thenewdaily.com.au/money/finance-news/2018/08/03/car-sales-fall-july/
    (from an australian website)

    – Still believing that Australia is NOT in a “recession” ?

  46. Gravatar of W. Peden W. Peden
    2. January 2019 at 15:27

    Willy2,

    What do you mean by “recession”?

  47. Gravatar of W. Peden W. Peden
    2. January 2019 at 15:38

    Also, by “Steve Keen”, I assume you’re referring to a person with that named who is not this character:

    https://www.abc.net.au/news/2016-07-29/australia-headed-for-recession-next-year,-professor-keen-says/7674154

    Remember that big rise in unemployment in Australia in 2017? Maybe it will happen in 2018?

    “A government is like a bank. And a government running a balanced budget is like a bank that simply lends back as much as it gets in repayments, therefore the money supply never grows and without that, you don’t have a growing economy.”

  48. Gravatar of Willy2 Willy2
    3. January 2019 at 07:21

    @W. Peden:
    – The person in that article is indeed the Steve Keen I am refering to. I agree, Keen was wrong when predicted the australian recession would start in 2017. But based on his latest work/calculations Australia (finally) entered a recession in 2018. And he uses a simple formula: “Income + change in debt = Aggregate Demand” (AD). And when that AD drops/shrinks (like in 2018 in Australia) then a country is in a recession.
    – I should have used the word recession without quotation marks.
    – “A government is like a bank. And a government running a balanced budget is like a bank that simply lends back as much as it gets in repayments, therefore the money supply never grows and without that, you don’t have a growing economy.”

    Fully agree with that statement. A growing economy always needs credit growth and in a shrinking economy debt always contracts or credit growth slows down. But I fear that the reality is (a bit more) complicated than that. E.g. the government is not the only player in an economy.

  49. Gravatar of Brian Donohue Brian Donohue
    3. January 2019 at 10:00

    You there Scott?

    Interesting times, things happening fast, long-term rates plunging.

    I got a new bet for you: Over/under on 2019 interest rate hikes at 1.0.

    I’ll take the under.

  50. Gravatar of Cameron Blank Cameron Blank
    3. January 2019 at 13:46

    Brian,

    Fed funds futures imply a 0% chance of a rate hike by year end now, so probably not a reasonable bet.

    53% chance of the fed lowering rates on or before the December 2019 meeting as well.

    https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

    The 10 year-3month spread also implies about a 20-25% of a recession in the next year per the chart Scott posted a little while ago. 5yr-3mo is now inverted. S&P 500 at July 2017 levels.

    Overall I think markets are saying they are worried about a minor recession but still put the odds at less than 50%. Definitely not forecasting a severe recession for now. Still, I think those worried about the Fed being too tight in the comments have a point.

  51. Gravatar of Brian Donohue Brian Donohue
    4. January 2019 at 08:22

    Cameron,

    I think Scott would say any recession would, in a sense, be self-inflicted.

    I hear what the markets are saying, and Powell, in his latest comments, shows he’s hearing too. This doesn’t gainsay the hawkish misstep on forward guidance from the last meeting- it basically cops to the misstep. Good.

    It’s possible for the Fed to be slow in reading the signs and make a costly mistake. The example of the Great Recession comes to mind. There’s still a whole “build up ammo” school out there in favor of raising rates- these people consider themselves paragons of probity.

    The dialogue never ends. That’s what data-dependent means. Keep up that theme, Jerome, like Yellen did.

  52. Gravatar of Michael Rulle Michael Rulle
    5. January 2019 at 05:17

    I could swear this is the first time you described how the Fed “operationally” should function. I know it’s obvious to you, because you describe in all your writings ‘why’ they should do this. Helpful to me at least. I am writing this “in the future” (Jan 5) and Powell seems to be following your prescription. I agree the Fed should focus on Macro targets in its communications——because even among those who actually get the joke (I don’t, but I try) errors in understanding can be made. And errors in thinking too.

    As an aside, I agree with you on the $15 dollar art. When I used to travel to Japan I would buy these 150-200 year old beautiful paintings for 25-100 dollars (they could have told me anything—-plus all other Americans too—-but their selling “pitch”—-never made but implicit—was that for Japanese 150 was not “old”!). I found the whole experience pleasant. Plus the store looked like a raggedy old “5 and dime” store from the 50s.

  53. Gravatar of H_WASSHOI (Maekawa Miku-nyan lover) H_WASSHOI (Maekawa Miku-nyan lover)
    5. January 2019 at 12:59

    (greeting)

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