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US Economy Doesn't Justify Fed's Flimsy Policies

US Economy Doesn't Justify Fed's Flimsy Policies

(Dollar Photo Club)

Friday, 26 August 2016 05:52 AM Current | Bio | Archive

It was in 1982 that Fed officials relocated their annual Kansas City Fed conference to Jackson Lake Lodge in Wyoming, to entice, among other things of course, then Fed chair Paul Volcker, who was an avid fly fisherman.

Anyway, since 1982, the Wyoming mountain resort has provided investors with an opportunity to fish for clues about what’s on the agenda of the Fed’s monetary policy.

Please take care, this does not mean we should expect too much from today’s Fed Chair Janet Yellen’s speech as there is a good probability she could be disinclined to provide much bait for investors to bite on.

Reviewing the facts of where we stand today, it is an undeniable fact that the Fed has been tightening its policy for a couple of years now through the medium of tighter quantitative policy by letting the ratio of its balance sheet to GDP to decline slowly. Nevertheless, it also must be said, that ratio has not declined as much as first was thought because of revisions to GDP.

For now, most inflation measures are normal. The oil price is low, but investors should better keep in mind that, for example, when one price is falling and when that indicates a problem in one market this does not mean a problem in the economy at large.

Also, if you have a job in the United States today, you are likely to be paid more than you were last year and the rate at which your wage is going up is increasing.

It’s also a fact that the impact of the dollar on the U.S. economy tends to be exaggerated while the impact of monetary policy on the currency remains a mystery, unless foreign exchange markets behave particularly badly. As until now, currency markets don't behave badly, there is no real justification for the Fed failing to start moving towards normalization.

In simple words, the state of the U.S. economy today does not justify ultraaccommodative monetary policy.

Yellen should better spell that out. If she’s going to do that today is another question.

The problem is that Yellen is a labor market economist with concerns about income distribution.

It’s an undeniable fact that the U.S. economic recovery has not been even. The pain of the recovery has fallen disproportionately on lower-skilled workers, which is the group that has been left behind by the forces of globalization.

Marshy policy is not supposed to be a re-distributive tool, but it does have implications for income distribution because it can impact things like long-term unemployment.

Finally, we also have the first revised U.S. GDP data today, but the nature of recent revisions should perhaps remind investors how imprecise that measure can be.

Elsewhere, the really bad news came out of Japan where consumer price inflation fell for the fifth month in a row with core consumer prices falling by 0.5 percent year-on-year (y/y) in July compared with a 0.4% drop in June and a consensus forecast for an unchanged annual rate. Falling oil import prices and some lower food prices were the driving forces behind the fifth consecutive decline, which was by the way the biggest decline since March 2013.

It might be good taking notice that the core consumer prices in Tokyo, which are made available a month before the nationwide data, fell by 0.4 percent y/y in August, which marks the sixth straight month of decline and exceeds the consensus forecast for a 0.3 percent drop and which indicates that the deflationary trend remains well in place.

It’s certainly not an overstatement to say that Japan has chronic inflation problem while Japanese consumers think inflation is a lot higher than it actually is, which is a unique situation among the major economies in the world, while, and that's another huge problem, Japanese consumers know very well that their wages are not going anywhere, which is of course an unhelpful combination.

Lowering inflation through lower oil prices may mitigate that problem somewhat.
In the meantime, the Bank of Japan is sitting back and is doing nothing. Please keep in mind that the Bank of Japan has mastered the art of doing nothing through the long years of practice in the late 1990s and, after all, that may actually be a sensible strategy.

At any rate, it hardly seems likely that this strategy is going to be any worse than any other policy the Bank of Japan has pursued.

Elsewhere, a small detail that is worth taking notice of is the YouGov/CEBR Consumer Confidence Index for the UK rose by 3.2 points in August, which is its biggest month-to-month jump since February 2013. The index, which stands at 109.8, has now recovered around half of the ground it lost following the EU referendum on June 23.

So, let’s wait and see if Ms. Yellen will make us any wiser today. 

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 U.S. economy today does not justify ultraaccommodative monetary policy.
fed, janet yellen, rates, investors
Friday, 26 August 2016 05:52 AM
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