Mister Quotey-Quote (or Thief)
JACKSON HOLE, Wyo. -- The nuggets below come from the
delivered last Friday.
The current strategy about monetary policy going forward can, I believe, be viewed as a two-step process. The first step is, pre-emptively, to slow growth to trend. If successful, this step would limit, though not necessarily remove, the threat of overheating, if output has already advanced beyond potential. The second step is to respond reactively to higher inflation, should the prevailing output gap prove to be inconsistent with stable inflation.
The first step is a continuation of the strategy underlying the recent policy tightenings. In my judgment, the unemployment rate has already declined to a sufficiently low level relative to my estimate of the NAIRU (nonaccelerating inflation-rate of unemployment) that we should no longer be attenuating the marginal policy response to further declines. But the current policy is, in my view, also an aggressive version of such a strategy because it is not a nonlinear response to further declines in the unemployment rate, but a forward-looking attempt to prevent further tightening of the labor market. I think that one of the subtleties of policy is sometimes being content to respond incrementally to the incoming data and sometimes becoming more aggressive and responding to forecasts. It is best that the policymakers are transparent about such shifts in the relative weight on the forecast in their policy decisions.
Once growth has slowed to trend and the output gap stabilizes, monetary policy may become more reactive, given the continued uncertainty about the levels of the NAIRU and the output gap. That is, policymakers might be prepared to slow the economy to trend growth to avoid the risk of higher inflation associated with still-lower unemployment rates and higher output gaps, but might be reluctant to reduce the perceived output gap without evidence from realized inflation that the prevailing gap is unsustainable.
Under such a policy, the response to inflation should, in my view, be more aggressive than it would otherwise be, for example, in the Taylor rule under certainty. This is an example of offsetting the attenuation in the response to the output gap with a more aggressive response to inflation realizations. In effect, the policy setting at trend growth and at the prevailing level of the output gap is presumed to be consistent with stable inflation. An increase in inflation (specifically in core inflation) would be evidence that the output gap is not in fact sustainable. As a result, the increase in interest rates should be the combined response to a slight increase in the estimate of the NAIRU and to an increase in the inflation rate at an unchanged estimate of the NAIRU.
A final component of the strategy, in my view, should be that policy should tighten further -- above and beyond what is presumed to be necessary to slow the economy to trend -- to the extent that efforts to stabilize the output gap fall short. For example, let us assume that growth ultimately moves to trend but, in the interim, the continued above-trend growth increases the output gap still further. In response, policy should tighten incrementally, encouraging below trend-growth and hence unwinding the further increase in the output gap.
The nugget below comes from the
The current gap between the growth of supply and demand for goods and services, of necessity, has been reflected in an excess in the demand for funds over new savings from Americans, including those savings generated by rising budget surpluses. As a consequence, real long-term corporate borrowing costs have risen significantly over the past two years. Presumably as a result, many analysts are now projecting that the rate of increase in stock market wealth may soon begin to slow. If so, the wealth effect adding to spending growth would eventually be damped, and both the rate of increase in net imports as a share of GDP, and the rate of decline in the pool of unemployed workers willing to work should also slow. However, so long as these two imbalances continue, reflecting the excess of demand over supply, the level of potential workers will continue to fall and the net debt to foreigners will continue to rise by increasing amounts.
Until market forces, assisted by a vigilant Federal Reserve, effect the necessary alignment of the growth of aggregate demand with the growth of potential aggregate supply, the full benefits of innovative productivity acceleration are at risk of being undermined by financial and economic instability.
The nugget below comes from a research note the
Salomon Smith Barney
economists delivered last Friday.
This week's surprising reports of strong consumer spending and construction outlays have prompted us to raise our first-quarter growth forecast to 5% and the full-year estimate to 3.8%. This scenario also is consistent with a changed outlook for the extent of Fed tightening. We now expect the funds rate to move up by 100 basis points (a full percentage point) and possibly more over the next six months, especially if the broad stock market can hurdle the continuing rise in energy costs.
The nugget below comes from a weekly wrap-up the
economists delivered last Friday.
The household, factory, and foreign sectors all exhibited unexpected vigor, suggesting the economy remains quite strong. These data, coupled with still accommodative financial conditions, have led us to raise our real GDP forecasts for 2000 and 2001 to 4.9% and 3.9% from 4.3% and 3.0%, respectively. For the first quarter of 2000, we now expect annualized growth of 5.0%, up from 4.0%. ... Our revised interest rate forecast calls for 150 basis points of tightening by the end of 2001.
The nugget below comes from a research note the Goldman economists delivered about a fortnight ago.
Unlike the CPI excluding food and energy, the median CPI (an alternative measure of underlying inflation released monthly by the Cleveland Fed) has accelerated noticeably in recent months. ... Since October 1999, the median CPI has risen at an annualized rate of 3.2%, against 1.8% for the core CPI. ... A statistical analysis of this gap suggests that core inflation is likely to pick up in coming months ... based on a regression analysis using monthly data for the period 1985 to 1999, we have found that the gap implies that core inflation -- measured by the three-month annualized rate -- is likely to accelerate to around 2-1/2% (annualized) in the next three months from less than 2% in the three months to January. For now, the best news on core inflation seems to be behind us.
And the nugget below comes from a research note the Goldman economists delivered about three weeks ago.
Nominal wage growth should pick up from 3-1/2% in late 1999 to around 4-1/2% in late 2000, assuming the unemployment rate does not rise. Our confidence in this forecast is relatively high, despite the slowdown in wage growth seen since mid-1998. Most likely, the latter was due to the plunge in headline inflation in the wake of the Asian crisis of 1997/1998. And the reason why wage growth has not yet reaccelerated is that the lags between price shocks and wages are longer than is sometimes thought. ... Thus, we should not have been too surprised about the subdued wage developments during most of 1999. After all, headline PCE inflation was below 1% throughout 1998 and did not begin to rebound until the first quarter of 1999. Because of this rebound, the strong fourth-quarter ECI is likely to be followed by further robust numbers in the coming year.
Long Story Short
There are two things to take away from all that copy-pasting.
(a) The economy grew at a 4.1% rate last year. It currently looks likely to grow that much (and perhaps more) again this year.
Good forecasters know it. And policymakers probably know it too ... even if some of them don't want to admit it.
(b) The central bank will tighten more than you think.
Forget that one-more-and-out shiite you hear in the wake of every hike. We are probably looking at four more increases.
Until Sally I Was Never Happy...
You now have two choices.
(a) You can listen to the people who have been dead right about both economic growth and policy action for some time now.
(b) You can listen to the people who have proven themselves foolish -- these are folks from both the
debt and equity
sides of the aisle, mind you -- about economic growth and policy action.
The mail makes it clear that this needs to be said again:
This column is one of the few things on the site that has nothing to do with stocks.
The focus of this column is the economy and the central bank -- and the impact they have on Treasuries.
I am genuinely touched that some of you write in so consistently (a) to ask just how bitter I am about higher share prices and (b) to encourage me to ... how to put this ... hook up with Abelson for some stock-bashing pillow talk.
You're wasting your time, though.
I love stocks.
And I just don't go that way.