| PBOC to stick to ‘tight’ stance |
| Goldman Sachs raises China’s 2008 inflation forecast to 6.8% |
To the extent ‘actual inflation’ (whatever that actually is- I realize the difficulties in that statement) is higher ‘actual real growth’ (same qualifications) is lower.
Might partially explain high sustained rates of ‘real’ growth?
Interesting in that it totally ignores inflation when predicting CB moves.
Maybe not only the Fed but the rest of the world’s CB’s don’t care about inflation:
Into the valley
One of the characteristics of a recession is a sudden drop off in activity, the point at which a slowdown turns into something more serious. Economists term this a discontinuity or a break in the data and it is this pattern which makes recessions so difficult to spot from simply tracking the daily data releases. There is evidence that we have hit such a point in the US with several indicators taking a tumble over the past month.
True, but these indicators aren’t yet sufficient:
For example, the service sector ISM fell to its lowest level since the last recession in 2001,
The first move of this indicator is very unreliable, and these types of drops have a recent history of getting reversed. The next update will be more meaningful.
consumer confidence reached a 16 year low
Yes, but again, this is not a reliable indicator
and we saw the first fall in payrolls for 4 years as firms trimmed jobs in construction and manufacturing.
Yes, but how quickly they forget the same was said when the August number came out negative, only to be revised to a very respectable positive number a month later.
And the December number was also revised up to a reasonable number from a weak initial report. The February number and revised January number will be out a week from Friday.
Meanwhile, activity in the housing sector remained weak and consumer spending has levelled off. The economy lost momentum at the end of last year with GDP rising just 0.6% at an annualised rate in the fourth quarter.
This could also be revised up soon as exports were higher than anticipated.
It is quite possible that this tipped over into a negative quarter in Q1 this year.
Yes, it’s possible, but this is biased analysis that simply cherry picked the worst possible data.
The Fed has not been slow to respond and cut rates by a further 50 basis points to 3% at its last meeting to bring the cumulative easing to 225 bps in this cycle. Fed chairman Ben Bernanke has shown that he will adopt an activist stance in the face of downside risks to activity, a departure from the gradualist approach of his predecessor Alan Greenspan. Bernanke is a student of the Great Depression in the US
Yes, and he has also expressed risks that existed only due to the gold standard of the time and don’t apply to current floating fx policy.
and so is well aware of the dangers of allowing confidence to slide and the economy falling into a liquidity trap. Sometimes described as pushing on a string, this was also the situation in Japan during the 1990s, where lower interest rates failed to stimulate activity.
Yes, that can happen due to tight fiscal policy. The difference between now/Japan and the gold standard days is that now there are no quantitative supply side constraints on lending. In the US today as with Japan credit is infinitely available to credit worthy borrowers. Today’s constraints come with bank perceptions of credit worthiness, as well as ‘regulatory over reach’ where bank regulators restrict lending. And, for another example, today the treasury can issue unlimited numbers of treasury securities (as did Japan) as rates at or below the CB’s target rates. On a gold standard, treasury borrowing drives up rates as it competes for funds with the private sector, and those funds are limited by the gold standard.
The current situation is not as severe as in these episodes, but does share the essential characteristic that the transmission mechanism from central bank rate cuts to the real economy is impaired and not functioning normally.
Confused as above.
This, of course, is the credit crunch where banks are tightening or withdrawing credit from the economy even as interest rates fall. Evidence of this is found in the continued tightening of lending conditions apparent in the Fed’s senior loan officer survey despite the fall in policy rates (see chart on front page).
Again, very different from gold standard constraints and easily overcome if understood, where the gold standard constraints are only overcome by going off it, as the US did domestically in 1934.
True, however, that employment, growth, and inflation are not functions of interest rates, as is nearly always the case.
It is this headwind which policy makers not just in the US, but also in the Eurozone and UK need to overcome. The problem extends into the markets for securitised debt which have in many cases dried up. In response to this and the weaker near term performance of the economy, we have reduced our forecast for the Fed funds target rate to 2% by May (previously 2.5%).
Regardless of inflation!
These inflation concerns have weighted more heavily in Europe than the US where the Bank of England and ECB continue to voice concern about second round effects from higher commodity prices into wages. Nonetheless, we still see scope for a further easing of policy from both central banks along with the Federal Reserve in coming months as activity weakens (see below for more on the UK and Eurozone).
More generally, our baseline view remains one where global growth slows in 2008 and quells inflation fears in the second half of the year. Our forecasts will be reviewed next month and although we already have a weak profile for US GDP growth we will trim our baseline projections. It is more than likely that the US is now in recession. However, we will still look for a modest recovery in the second half of the year as the housing market stabilises and the economy begins to experience some of the effects of looser fiscal and monetary policy. Nonetheless, growth is expected to remain below trend throughout 2008, so it will feel more like a stabilisation than a recovery. More of an “L” shaped recovery than a “V”.
Fed Sees Rate Low `for a Time’ Then Possible Reversal (Update1)
by Scott Lanman
(Bloomberg) Federal Reserve officials signaled they are prepared to quickly reverse last month’s interest-rate cuts after concluding that borrowing costs need to be kept low for now.
Policy makers cut their 2008 growth forecasts and said that rates should be held down “for a time,” minutes of their Jan. 29-30 meeting showed yesterday. They also called inflation “disappointing,” and some foresaw raising rates, possibly at a “rapid” pace once the economy recovers.
The threat goes beyond remarks by Chairman Ben S. Bernanke, who last week warned that policy will have to be “calibrated” over the next year to meet both inflation and growth objectives.
Yes, the issue is they believe an output gap greater than ‘zero’ is required to bring down inflation over time; so, they can’t afford to let the economy fully recover and grow at an inflationary pace.
So while they don’t want to allow a massive collapse, they also don’t want the output gap to be too narrow to bring down inflation.
This could mean, for example, a GDP growth rate speed limit of between 1% and 2% given current data points of GDP growth and coincident inflation.
That would mean achieving ‘stability’ at current GDP and employment levels rather than a ‘recovery’ to lower unemployment and 2.5%+ GDP.
With inflation expectations considered to be on the verge of elevating, the FOMC now faces elevating risks of both inflation and recession.
Looks very much like the 1970’s to me.
Yes, the labor situation was different then – strong unions due to strong businesses with imperfect competition, umbrella pricing power and the like.
But it was my take then that inflation was due to energy prices, and not wage pressures. Inflation went up with oil leading throughout the 1970’s and the rate of inflation came down only when oil broke in the early 1980’s, due to a sufficiently large supply response. It was cost push all the way, and even the -2% growth of 1980 didn’t do the trick. Nor did 20%+ interest rates. Inflation came down only after Saudi Arabia, acting then as now as swing producer, watched its output fall to levels where it couldn’t cut production any more without capping wells, and was forced to hit bids in the crude spot market. Prices fell from a high of maybe $40 per barrel to the $10-15 range for the next two decades, and inflation followed oil down. And when demand for Saudi production recovered a few years ago they quickly re-assumed the role of swing producer and quietly began moving prices higher even as they denied and continue to deny they are acting as ‘price setter’ with inflation again following.
And both then and now everything is ultimately ‘made out of food and energy’ and hikes in those costs work through to everything else over time.
There are differences between then and now. A new contributor to inflation this time around are our own pension funds, who have been allocating funds to a passive commodity strategies as an ‘asset class.’ This both drives up costs and inflation directly, and adds to aggregate demand (also previously discussed at length).
Also different is that today we’ve outsourced a lot of the labor content of our gdp, so I suggest looking to import prices of high labor content goods and services as a proxy for real wages. And even prices from China, for example, have gone from falling to rising, indicating an inflation bias that corresponds to the wage increases of the 70’s.
Costs of production have been going up as indicated anecdotally by corporate data and by indicators such as the PPI and its components. These costs at first may have resulted in some margin compression, but recent earnings releases seem to confirm pricing power is back and costs are pushing up final prices, even as the US GDP growth slows.
US policies (discussed in previous posts) have contributed to a reduced desire for non residents to accumulate $US financial assets. This plays out via market forces with a $US weak enough to entice foreigners to buy US goods and services, as evidenced by double digit growth in US exports and a falling trade gap. This ‘external demand’ is providing the incremental demand that helps support US gdp, and corporate margins via rapidly rising export prices.
World demand is high enough today to support $100 crude, and push US cpi towards 5%, even with US GDP running near zero.
As long as this persists the cost push price pressures will continue.
Meanwhile, markets are pricing continued ff rate cuts as they assume the Fed will continue to put inflation on the back burner until the economy turns. While this is not a precise parallel with the 1970’s, the era’s were somewhat similar, with Chairman Miller ultimately considered too soft on inflation during economic weakness. He was replaced by Chairman Volcker who immediately hiked rates to attack the inflation issue, even as GDP went negative.
Trichet May Not Cut Rates in 2008, Say Merrill, ABN
by Simon Kennedy
(SNIP)
(Bloomberg)Erik Nielsen, Goldman Sachs’s chief European economist, disagrees. He said the ECB’s primary mandate is to preserve price stability, so it has no room to follow the Federal Reserve and the Bank of England, even as economic growth weakens. The Fed slashed its main rate by 1.25 percentage points last month, and the Bank of England cut its benchmark by a quarter point Feb. 7 for the second time in three months.‘Hurdle’
“Inflation and expectations for it are a hurdle for a cut,” Nielsen said. “Inflation is very stubborn” in Europe.The annual pace of consumer-price increases in the euro region accelerated to a 14-year high of 3.2 percent in January, pushed above the ECB’s 2 percent limit for a fifth month by food and energy costs. Inflation in France, the euro-area’s second largest economy, accelerated in January to the fastest pace in at least 12 years, according to data released today.
US CPI is up nearly 4.5% year over year with no let up in sight, and core measures are above FOMC comfort zones and picking up steam as well.
Survey shows people are watching TV and reading the newspapers.
For the third consecutive month, more households reported that their financial situation had worsened rather than improved over the past year.
But due to inflation, not falling nominal income:
Moreover, due to a higher expected inflation rate and smaller expected wage gains, 46% of all households anticipated declines in their inflation adjusted incomes during the year ahead, the worst reading since the 1990 recession.
Overall, consumers expected a year-ahead inflation rate of 3.7% in early February, up from 3.4% in the prior three months.
The Fed uses this as one of their inflation expectation indicators. It has gone from too high to even higher.
In contrast, long term inflation expectations, a proxy for core inflation, was unchanged and well anchored at 3.0% in February.
Yes, but still too high.
Eighty-six percent of all consumers thought that the national economy was in decline, the highest level recorded since 1982. Year-ahead prospects for the national economy were just as bleak as 72% expected bad times, a level comparable to the worst levels in the recessions of the early 1990’s and 1980’s. The anticipated downturn is expected to result in more joblessness in the year ahead, a prime concern of consumers. A rising unemployment rate was expected by 52% of all consumers in early February, up from 33% a year ago, and comparable to the peak levels recorded in the months surrounding prior recessions.
The rest is more of the same and shows influence of the media.
Personal Financesâ€â€ÂCurrent went from 98 to 96
Not bad.
Personal Financesâ€â€ÂExpected 116 to 108
As above.
The survey clearly shows expectations have deteriorated for both the economy and inflation.
♥
(an interoffice email)
Looks familiar – the CB forecasting inflation falling from higher and higher levels as it move up rather than down as originally forecast.
———- Forwarded message ———-
From: Milo
Date: 2008/2/14
Subject: This Picture says it all, I recon – 86% OIS odds of a hike in March
To: Warren Mosler, Karim
The RBA has come to grips with Australia’s stark inflation reality. Inflation forecasts have been revised up significantly (see Figure 1), the RBA will deliver
more rate hikes and domestic demand will eventually slow. At the moment, forecasters are grappling with how high the terminal cash rate will be. Is it
7.5%, 8.0% or higher?
“However, the downside risks to growth have intensified since the last meeting, and markets are pricing in another rate cut..”
Zimbabwe’s Inflation Rises to Record 66,212%
by Brian Latham
(Bloomberg) Zimbabwe’s annual inflation more than doubled to 66,212 percent in December, the Central Statistical Office said in a document released to local banks.
The December figure “was an increase of 39,741 percentage points on the November rate of 26,470 percent,” the office said in the document released in the capital, Harare, this week.
Food and non-alcoholic beverages rose 79,412 percent in December, while non-food inflation was 58,492 percent, the office said.
Zimbabwe has the world’s highest rate of inflation and the world’s fastest-shrinking peace-time economy, according to the World Bank. The International Monetary Fund estimated inflation reached 150,000 percent in January, the Zimbabwe Independent reported, citing a document that hasn’t been officially released by the lender.
♥
Agreed that government can buy stocks to keep them from falling, as HK did.
But the 1930s was a gold standard deflationary collapse.
The Fed was constrained from net buying anything due to the risk of losing gold reserves.
The risks are very different now with non-convertible currency/floating fx:
Depression risk might force U.S. to buy assets
by John Parry
“The Fed probably can’t fix it all on its own now,” Connolly said. “There is a chance the Fed gets forced into unconventional cooperation with government,” which could involve buying a range of assets to reflate their value.
Operationally this can be readily done. But what assets would the Fed want to reflate? Equities represent a return on investment, which is what it is. Yes, it might make sense to have a bid, like HK did, for ‘market-making stabilization’ purposes, but not to hold longer term, as that would be public ownership of the means of production, etc.
That would be reminiscent of some steps the U.S. government took in the 1930s when the economy was mired in deflation and high unemployment.
One turning point came when agricultural prices were restored to their pre-slump levels, Connolly said. Such measures were among the New Deal programs that President Franklin D. Roosevelt launched to bolster the economy.
Note that we don’t have a problem with low agricultural prices today!
Nor with low energy prices or plunging nominal wages.
Only housing prices have been falling due to excess inventory that I calculate will be cleared in a few months. The risk is that housing prices rise after that.
Either way, investors face bleak prospects now without some kind of further government intervention, he said.
Investors, yes. Consumers, not so bleak. Jobs and income are holding up, and most forecasts are only minor rises in unemployment. And with booming exports and the fiscal package in place, GDP has been revised up.
Those steps might offer clues to investors in stocks and commodities, which Connolly expects the government might be ultimately force to step in and buy to stabilize markets.
Yes, as above. Maybe some market stabilization in the financial sector. I don’t see anything in the real sector that needs more government buying right now. Seems CPI is high enough as is for more mainstream economists.
He expects that a depression may be averted, but only by the state and the Fed reinflating the price of such assets.
If we do get a recession, it will be due to falling demand from something like a tax hike to balance the budget.
Beleaguered housing, non-government fixed-income securities and even the now overvalued Treasury market have little hope of generating substantial returns for investors over the next few years, he said.
Earned income is sufficient to drive effective demand, even without investor income.
“If we don’t avoid depression, the only thing worth holding is cash,” he added.
As we watch it buy less and less CPI? Looks more like we are turning the currency into wallpaper, at least so far.
As long as resources producers spend their incomes on imports of real goods an services (and don’t ‘save’ it), world demand is likely to be sustained at whatever prices they wish to charge.
Twin themes seem to be continuing: weaker demand with higher prices. But no recession, yet.
♥
If inflation is now above Bernanke’s comfort zone, as per Yellen who has been more dovish than Bermanke, and above their long-term target of maybe 2%, it can only be brought down by maintaining an output gap greater than zero under the mainstream theory they all subscribe to.
Particularly with the negative supply shocks of food, crude, and import/export prices persisting. And with energy prices (headline CPI) now showing up in core prices, also as per Yellen, inflation expectations are showing signs of coming unglued.
And the fiscal package has likely increased the Fed’s growth forecasts (smaller output gap) for Q2, Q3, and Q4.
The Fed believes a zero output gap means about a 4.75% unemployment rate.
That means the Fed wants to keep the economy from deteriorating and unemployment from rising, but it also doesn’t want unemployment falling to 4.75% which would mean it would have to act (rate hikes) to get it back up to something over 5% to meet long-term inflation targets.
So while Bernanke can say he stands by to do everything necessary to avoid a financial collapse, he also can’t allow the output gap to go to zero.
♥
