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Get Ready for Yellen's 'High-Pressure Economy'

Get Ready for Yellen's 'High-Pressure Economy'

Janet Yellen (Getty/Chip Somodevilla)

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Monday, 17 October 2016 07:45 AM Current | Bio | Archive



Speaking on Friday in Boston, Fed Chair Janet Yellen gave a mostly academic prepared speech wherein her remarks were interestingly posed as questions and of course didn’t enlighten a lot as there are still no answers to these questions.
 

Anyway, Yellen's comments added to the still intensifying debate within the Fed itself if U.S. growth is sufficient for allowing Fed rates to start moving, albeit extremely slowly, towards normalized levels over the next few years. She said this could generate a temporarily “high-pressure economy,” with robust aggregate demand and a tight labor market (thanks to very low interest rates for longer). 


 

Boston President Eric Rosengren, who hosted the conference, stated about the present Fed funds rate level: “If you wait too long ... the more likely you are going to have to do it more quickly ... The less likely you are to calibrate it just right.”


 

In the U.S., we have the release of industrial production and capacity utilization data. The former is of moderate interest, and it’s not likely to make itself heard above all the noise coming from the presidential election campaign.
 

On the contrary, capacity utilization rate needs considerable care in interpretation. Capacity utilization, as officially reported, does not measure the spare capacity of the service sector and it may not give a very accurate picture of the spare capacity of the self-employed. Capacity utilization may have had some use in the 1940s, but its relevance to judging the macro state of the modern postindustrial economy has diminished.
 

There is also central bank speak on both sides of the pond.
 

In the U.S., we have Fed Vice Chair Stanley Fischer on the agenda, but it seems unlikely that he will deviate from the central case of a rate hike in December. Now, as he is basically a monetarist, any comments that he makes on quantitative policy will be of particular interest.
 

Over in the UK, Bank of England Deputy Governor Ben Broadbent is also scheduled to speak.
 

Here it is important to keep in mind that he has already said that the pound’s slump will help the United Kingdom’s economy to overcome the shocks generated by Brexit. In a BBC interview he stated: “Having a flexible currency is an extremely important thing, especially in an environment when your economy is facing a shock that’s different from your trading partners … in the shape of the referendum, we’ve had exactly one of those shocks. Allowing the currency to react to that is a very important shock absorber.”


 

Realistically speaking, this seems a little dubious because U.K. exports are not especially price sensitive, which means that a weaker pound won’t "per se" impact that much economic activity. Of course, profits from experts will get a boost, that’s for sure.
 

But then, if uncertainty deters exporting companies from doing anything with those profits, then there is likely to be little economic gain from a weakening pound.
 

On the other hand, because of sterling’s shift is seen as structural and because the UK imports quite a lot of its commodities needs, import prices are already rising, which impacts inflation.
 

Finally, the euro area annual consumer price inflation rate came in at 0.4 percent in September, up from 0.2 percent in August. In September 2015 the rate was -0.1 percent.


 

It’s clear, the oil base effects are starting to show up and for investors. This is important as there is more oil base effect influence to come in the months ahead while headline consumer price inflation will also start its journey of convergence to the core consumer price inflation price figure.
 

The core CPI figure gives a better indication of the inflation pressures in the euro area economy and that’s why the ECB is going to have to consider its position on quantitative policy.
 

Markets are already starting to consider this as we see, among other things, all 10-year Euro sovereign yields rising.


 

Thursday could become interesting as the ECB Governing Council will have its monetary policy meeting and ECB President Draghi will give his press conference.

 

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

 

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The oil base effects are starting to show up and for investors this is important as there is more oil base effect influence to come in the months ahead while headline consumer price inflation will also start its journey of convergence to the core consumer price inflation price figure.
investors, oil, inflation, economy
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2016-45-17
Monday, 17 October 2016 07:45 AM
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