Notes From Underground: Will Janet Be Wearing Her High School Nehru? Or Her PHD Graduation Nairu?

Wednesday brings the results of the FOMC meeting and the official policy statement laying out Fed insights into the domestic and of recent concern the fragile state of the global economy. There will be no press conference so the “kremlinologists” of fedspeak will be busy parsing every nuanced word. I WILL BE WATCHING WHAT OUTFIT THE FED CHAIR IS WEARING. IF SHE IS WEARING A NEHRU JACKET I WILL ASSUME THE FED IS MORE CONCERNED ABOUT THE EFFECT OF GLOBAL MARKETS KEEPING DOWNWARD PRESSURE ON AMERICAN WAGES. Domestic-oriented analysts focus on the U.S. unemployment rate of 5.0% as the key factor for the need for the FED to raise rates. The flawed models of the FED fail to take into account the pressures on the U.S. economy from capital and labor situations worldwide.

The standard models under which Yellen and her colleagues have been trained are dependent on what is referred to as the non-accelerating inflation rate of unemployment, or NAIRU. Bernanke often referred to this indicator as positive or negative output gaps. When the gap is deemed negative there is room for the FED to err on the side of caution as slack remains in the labor pool, which puts downward pressure on wages. A positive gap is beneficial for workers as a shortage of employees means wages can rise as employers BID for workers.

The question is: Do output gaps matter when capital and production flow unrestrained around the globe? Will 2 billion workers in Asia act to keep wages down as imports replace domestic production in the U.S.? If Yellen invokes the language of the March FOMC minutes, expect there to be many more references to global economic conditions. The FOMC minutes had at least nine statements about global economic weakness while the statement itself noted these concerns:

a. Net exports soft;
b. Global economic and financial developments continue to pose risks; and
c. Readings on financial and international developments.
Now this meeting is even more interesting on the issue of global developments is that Chair Yellen met with President Obama and Vice President Biden at the White House. We don’t know what was discussed but it could have been Brexit, Europe or China … all international concerns.
Pay close attention to the vote .Last time it was 9-1 in favor of maintaining the present policy with Kansas City Fed President Esther George as the lone dissenter. St. Louis Fed President James Bullard, Cleveland Fed President Loretta Mester and Boston Fed President Eric Rosengren have all been making hawkish speeches since the last meeting so the most HAWKISH OUTCOME WOULD BE A 7-3 VOTE. A vote of this nature would send all asset classes lower. Let us see if the EYAS (baby hawks) have grown strong wings to fly from the Yellen nest. Will the EYAS  morph into NAYS? If the dissenting votes were to be that high it would indicate that Yellen is losing her hold on the Board and the markets will become very nervous. Watch the December eurodollars, the flattening of the yield curves, the gold market and a rally in the U.S. dollar for confirmation of this theory.
***The BOJ meets late tomorrow and many are expecting Governor Kuroda to embark upon further easing because of the recent strength in the YEN, especially as the currency has gained in the face of a very aggressive QE and negative interest rate program. The talk is that the ABE government is concerned about the onset of deflation but with the recent G-20  “agreement” that promises not to depreciate one’s currency as a matter of economic policy I believe Kuroda will be very cautious in bringing global criticism upon the BOJ, especially with the TPP trade agreement heading to Congress. There are some who believe the BOJ will mimic the ECB and go to a negative lending policy to incentivize banks to lend, but the Chair of MFG, a major financial institution has come out publicly against negative rates.
As Tobias Harris of the Teneo group suggests, the BOJ could increase its purchases of ETF and real estate investment trusts (REITs). Mr. Harris acknowledges that the purchasing of equities can lead to criticism of ABE and Governor Kuroda manipulating the stock market prior to upcoming elections. But the greater fear is the market response to the BOJ not delivering any type of stimulus. The central banks of the world have broken the signalling mechanism for bonds and now equities. As Peter ,Paul and Mary sang at Chair Yellen’s PROM, “when will they ever learn, when will they ever learn.”

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7 Responses to “Notes From Underground: Will Janet Be Wearing Her High School Nehru? Or Her PHD Graduation Nairu?”

  1. kevinwaspi Says:

    They have not, and cannot learn. The physicist models cannot distinguish between hedge debt, spec debt, and Ponzi debt, nor the very different ways they impact economic activity. Economics is dead, long replaced by econometrics. Hail the Model, the all knowing Model!

    • yra Says:

      Kevin–seems it is time to revisit “Time on the Cross” as a classic failure of econometrics

  2. Alex Says:

    Is it possible in a sentence or two to answer why all the stimulus in Japan has not elevated their assets and stockmarket to very strong levels versus Western stimulus has.

    This has always confused me.

    • yra Says:

      Alex–highly doubtful for that would call into question why the fed has set the table or followed what the Japanese did—-according to the DSGE model is heavily domestic oriented so it would be difficult to cite them

  3. kevinwaspi Says:

    Good point on the Time reminder. Like its “finding” that the total factor productivity multiplier of slavery was 1.3, I believe current models will find their coefficients to be quite questionable as well. If I can find statistically significant correlation between the number of cigarette butts on the ground outside the C Street entrance to the Eccles building and the economic output gap, should I use the number of cigarette butts as an input variable in my “model”? Economists would laugh, econometricians celebrate a higher order of explanatory power.

    • yra Says:

      Kevin –prof I love when Bernanke and the MIT ride the tailcoat of kindleberger—it makes me laugh as if I am having a minsky moment

  4. Kevin G. Waspi Says:

    Big Grin Yra!
    They are not worthy of riding the tailcoats of Charles Kindleberger, Hyman Minsky,Joseph Schumpeter, Friedrich Hayek, and a host of others.

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