BRIEFLY NOTED: For 2022-04-20 We: What is the incoming flow of data teaching me, as I try to keep my view of the macroeconomic outlook marked to market? In normal times, the gearing between the Federal Funds rate and the real Treasury 10-year rate is about 1/3: a 3%-point rise in the Federal Funds rate carries with it a 1%-point rise in the real Treasury 10-year rate. Since the start of this year, we have had an 0.25%-point rise in the Federal Funds rate, and aa 1%-point rise in the real Treasury 10-year rate—nine times the standard gearing. Why? Because monetary policy is not just the current level of the Fed Funds rate, but is the current level plus all the forward guidance that gives the anticipated future path of the Fed Funds rate. In the shifts in monetary policy that you should pay attention to are not what the Fed does at its meetings, but rather the unexpected component of Fed actions, and the surrounding word cloud of communications that are the forward guidance. If you thought at the start of this year that the Fed was behind the curve, and that it needed, through Fed-Funds rate increases and shifts in forward guidance, to do things with effects on long-term real interest rates that would be the equivalent of a 5%-point increase in the Fed Funds rate, then I have news for you: The Fed is 3/5 of the way there. If you thought, like me, that the costs of tightening too soon and being wrong were very high—that the 2010s were a disaster, in which an ænemic secularly-stagnant economy grossly underperformed in employment and productivity growth, substantially because the Fed had let itself get trapped at the zero lower bound in nominal interest rates—then the past four months should lead you to think that the Fed is, if anything, slightly ahead of the curve right now, and should stay its (currently planned) course of Fed-Funds interest-rate increases, rather than accelerate them. Rather than accelerate rate increases further, it should watch what changes in financial conditions over the past four months are about to do to the future of housing investment. But one joker has been dealt: The 5/5 forward rate—what those trading in the bond market expect CPI inflation to be not over the next five years but over the five years after that—is now trading at the very top of what has become the normal range. If the 5/5 rate moves higher, it will be a sign that the bond market no longer trusts the Fed to maintain inflation at or below its target over the long run. That would be a sign that the economy’s inflation anchor is not lost, but starting to drag. And that would be a powerful piece of information suggesting that the Fed should accelerate its tightening cycle a notch. Overall, however, I am still on Team The-Fed-Has-Got-This, and Team This-Is-Not-Like-the–1970s-at-All.
"If you thought at the start of this year that the Fed was behind the curve, and that it needed, through Fed-Funds rate increases and shifts in forward guidance, to do things with effects on long-term real interest rates that would be the equivalent of a 5%-point increase in the Fed Funds rate,"
At the START of the year I was pretty sanguine. They had started tightening in November rather than September but the 10 year (CPI) TIPS was only a bit above 2.3% (my guess at the equivalence to 2% CPE). This still looked like the Fed managing a bit of surprise COVID/supply chain shock. What I mainly wanted them to do was reiterate their average inflation target.
I only began to get worried in March when the 10 year TIPS rose to around 3%. I'm still relatively confident that the can get inflation back down without a real recession, but I really DO wish that they had started a couple of months sooner.
In principle I never have opinions about which instrument the Fed should move by how much. THAT is what it has a staff for.
hey I am not being a smart ass- I am really that bad at math.. but isnt this a 12 times normal gearing not 9? I took 3/.025 =12.. I really am that bad at this stuff.. Help?
I was curious about this 5 x 5 claim, so I went over to the Cleveland Fed to check their estimates of expected inflation, term risk premium, and inflation risk premium. The results were inconclusive; all three measures show sudden recent upticks. The expected inflation uptick looks the largest, but I wouldn't call it "the very top of what has become the normal range" unless that means post 2008.
The term structure of expected inflation was, uh, unexpected? A very sharp decline from 3.4% first year to 1 x 1 forward of 1.8%, then rising again to 2% and very gradually higher.
It would be interesting to know whether there have been any anomalous changes in the basis between TIPS 5x5s and the corresponding inflation swaps. Unfortunately, I don't have access to a Bloomberg terminal ...
The anti-privatization argument was always implicit in James Q. Wilson's Bureaucracy. The book argued that public-sector institutions fail when tasked with conflicting missions, but succeed when their missions are unitary or complementary. There is nothing inherently inferior about public-sector efficiency. (The same is true for private-sector institutions, although it is muted a bit because profit-seeking is kind of a unitary mission.)
"If you thought at the start of this year that the Fed was behind the curve, and that it needed, through Fed-Funds rate increases and shifts in forward guidance, to do things with effects on long-term real interest rates that would be the equivalent of a 5%-point increase in the Fed Funds rate,"
At the START of the year I was pretty sanguine. They had started tightening in November rather than September but the 10 year (CPI) TIPS was only a bit above 2.3% (my guess at the equivalence to 2% CPE). This still looked like the Fed managing a bit of surprise COVID/supply chain shock. What I mainly wanted them to do was reiterate their average inflation target.
I only began to get worried in March when the 10 year TIPS rose to around 3%. I'm still relatively confident that the can get inflation back down without a real recession, but I really DO wish that they had started a couple of months sooner.
In principle I never have opinions about which instrument the Fed should move by how much. THAT is what it has a staff for.
hey I am not being a smart ass- I am really that bad at math.. but isnt this a 12 times normal gearing not 9? I took 3/.025 =12.. I really am that bad at this stuff.. Help?
I was curious about this 5 x 5 claim, so I went over to the Cleveland Fed to check their estimates of expected inflation, term risk premium, and inflation risk premium. The results were inconclusive; all three measures show sudden recent upticks. The expected inflation uptick looks the largest, but I wouldn't call it "the very top of what has become the normal range" unless that means post 2008.
https://www.clevelandfed.org/our-research/indicators-and-data/inflation-expectations.aspx
The term structure of expected inflation was, uh, unexpected? A very sharp decline from 3.4% first year to 1 x 1 forward of 1.8%, then rising again to 2% and very gradually higher.
It would be interesting to know whether there have been any anomalous changes in the basis between TIPS 5x5s and the corresponding inflation swaps. Unfortunately, I don't have access to a Bloomberg terminal ...
Spade and hat: He’d just come back from harrowing hell, and He figured this place could use some sprucing up, too. Those tomb guards are so untidy!
That fits!
The anti-privatization argument was always implicit in James Q. Wilson's Bureaucracy. The book argued that public-sector institutions fail when tasked with conflicting missions, but succeed when their missions are unitary or complementary. There is nothing inherently inferior about public-sector efficiency. (The same is true for private-sector institutions, although it is muted a bit because profit-seeking is kind of a unitary mission.)
es, indeed. Very good book...
https://onezero.medium.com/demonopolizing-the-internet-with-interoperability-b9be6b851238
Thx...