Tags: fed | yellen | dots | economy

Connecting Dots on Fed Rate Strategy Leads to Dead End

Connecting Dots on Fed Rate Strategy Leads to Dead End

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Thursday, 15 December 2016 07:21 AM Current | Bio | Archive

Twitter has been silent on the Federal Reserve so far.

Does this mean that Donald Trump is respecting Fed independence? Or does it mean that he has dictated a tweet and has just not gotten around to typing it up?

It can hardly be taken as an endorsement of the Fed, when Fed Chair Janet Yellen specifically declared that additional fiscal stimulus was not necessary to boost employment at this stage.

Of course, this is a statement of the economically obvious at a time when the Fed is operating at full employment for skilled and semi-skilled labor and wage pressures are creating a rising inflation threat, but to suggest fiscal stimulus is not needed is now dangerously close to laissez measure stay.

Markets, meanwhile, have focused on the cursed dots of the Fed’s dot-plot chart of forecasts.

Fed members have been very consistent in cursing that the cursed dots were ever published. It seemed like a good idea at the time, but markets obsess over these predictions, which have no probability attached to them and which can give a misleading impression of the true balance of policy risks.

The fact that the median of the cursed dots indicate 3 rate increases next year does not really say very much at a time of considerable economic uncertainty.

Yellen indicated that the movements of the cursed dots should not be taken too seriously, but that lone voice of sanity was unheard in the wilderness of media hysteria.

The media wanted to write sensational headlines and the hawkish Fed provides sensational headlines, so this has been blown out of proportion.

In fact, apart from the laissez measure stay of suggesting no need for fiscal stimulus, this was a pretty neutral Fed overall. Yes, the Fed will raise next year, but 3 hikes in 2017 is by no means certain nor even the most likely scenario, which could of course be helpful to investors for keeping in mind.

Away from the real world of central bank realities and into the fantasy realm of opinion pollsters, the Euro area PMI opinion poll of business sentiment in its preliminary form for December came in stable.

The overall health of the Euro area economy continues to be perfectly reasonable, in aggregate. There is of course a wide range of experiences beneath the surface, which is the dilemma for the European Central Bank (ECB).

The euro doesn’t really work that well as a monetary union and it is the divergence of growth that is the problem. Investors should also keep in mind that politics play a more avert role in the Euro area.

U.K. retail sales, which are certainly worth a glance, continued to grow a little bit in November and because sales have grown robustly during the past 2 months all this hints that the sector will contribute positively to growth in Q4.

The impact of sterling’s decline on the consumer has been muted so far, but we shouldn’t get carried away with this. Yes, the effects are starting to creep in on some of the numbers.

Meanwhile the United States issues consumer price inflation data today. Any strength here may add to the perception of a hawkish Fed, not because the Fed is necessarily hawkish, but because it fits a simple narrative that fits into a hash-tag quite neatly. This is what passes for critical analysis.

The fact is that domestic pressures are driving U.S. inflation higher. The oil price will impact headline inflation and core inflation to a lesser extent, but ultimately 70 percent of U.S. prices are determined by domestic labor costs, and indicators like the Fed’s wage tracker index show these to be accelerating.

Hence Yellen’s comment on why fiscal stimulus is not needed to boost employment.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.

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Twitter has been silent on the Federal Reserve so far. Does this mean that Donald Trump is respecting Fed independence? Or does it mean that he has dictated a tweet and has just not gotten around to typing it up?
fed, yellen, dots, economy
645
2016-21-15
Thursday, 15 December 2016 07:21 AM
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