EE UU: Tendencias en mercado laboral siguen prometedoras

Genevieve Signoret

Si me han estado siguiendo en Twitter o han revisado nuestros pronósticos actualizados, sabrán que veo un alto riesgo de que la economía estadounidense entrará pronto o ya ha entrado en recesión. Recuerden que las recesiones inician con mera desaceleración, por lo que el hecho de que la actividad siga en expansión no basta para refutar la hipótesis de recesión.

En EE UU, las solicitudes de compensación por desempleo dan indicios más oportunos de puntos de inflexión en el ciclo económico que la tasa de desempleo. Esta gráfica del blog (de lectura obligada para cualquier analista) Calculated Risk muestra que la tendencia aún indica expansión.

Estaremos monitoreando este indicador con especial atención en semanas venideras.

Intial

Comentarios: Deje su comentario.

¿Un banco central debería desinflar burbujas elevando tasas?

Genevieve Signoret

En EE UU, la baja inflación y la lentitud de los salarios sugieren que, no obstante la baja tasa de desempleo, los mercados laborales permanecen débiles. ¿Entonces por qué la Fed tiene ganas de normalizar ya su postura monetaria? Una posibilidad es su temor de que surjan otra vez burbujas en el mercado de bienes raíces. De hecho, diversos expertos ya emplean la palabra burbuja para describir las alzas en el segmento de vivienda multifamiliar. El que la Fed intente moderar o desinflar burbujas conlleva a la pregunta, ¿es posible que un banco central desinfle una burbuja en bienes raíces sin inducir una recesión? En su reciente nota de investigacion Interest Rates and House Prices: Pill or Poison? Òscar Jordà, Moritz Schularick y Alan M. Taylor de la Fed de San Francisco sugieren que no.

Inician motivando su decisión de explorar la relación entre las tasas de interés y el precio de las casas en los Estados Unidos:

This Economic Letter investigates the link between interest rates, mortgage lending, and house prices. Quantifying this link is important in assessing whether or not interest rate policy can be used to guard against leveraged asset price booms in practice. Housing plays perhaps the most important role among asset classes because purchases are typically leveraged through mortgages. Many consider the 2002–06 housing bubble an important trigger of the subsequent financial crisis. However, economists disagree about the role that low interest rates played in fueling the house price boom. Our goal in this Letter is different. We instead ask how much interest rates would have had to rise to keep housing prices under control.

Demuestran que el uso de tasas para desinflar burbujas sería eficaz pero costoso. De hecho, estiman que, para desinflar la burbuja hipotecaria que condujo a la crisis financiera de 2007-08, la Fed habría tenido que elevar la tasa de fondos federales al nivel estratosférico de 8%, nivel que, según sus cálculos, habría causado más daño que la Gran Recesión:

By our calculations, such a large increase in interest rates would have depressed output more than the Great Recession did, roughly speaking.

Concluyen que desinflar una burbuja en bienes raíces elevando tasas de interés luce factible pero contraria al doble mandato de la Fed:

What is the takeaway then? Slowing down a boom in house prices is likely to require a considerable increase in interest rates, probably by an amount that would be widely at odds with the dual mandate of full employment and price stability…In restraining asset prices, while the power of interest rate policy is uncontestable, its wisdom is debatable.

Agradecemos a Tim Duy por habernos señalado esta nota de investigación.

Comentarios: Deje su comentario.

Slowdown

Genevieve Signoret

Macro Views

Activity

Signs are everywhere that economic activity slowed down in quarter three everywhere, though especially in emerging economies and in particular in manufacturing and international trade. China’s GDP slowed to a quarter-on-quarter annual rate of 6.9% in quarter three. Brazil’s economic activity index had contracted again in August. We find persuasive the arguments set forth by JPMorgan and others that the manufacturing slump is stemming from a mere inventory correction. These happen when companies overshoot in their demand forecast and build up unwanted inventories, which they then have to shed. This fits jobs market data, which do not speak of layoffs.

This week’s slew of global manufacturing PMIs and, for Korea and the UK, first estimates of Q3 GDP will clue us in as to whether output is recovering in quarter 4.

Balance of payments

Turkey is better braced for a Fed hike than it was back in May 2013 when then Fed Chair Ben Bernanke first mentioned tapering. Last week, Turkey reported shrinkage in its current account deficit to a trailing 12-month August ratio of 5.5% of GDP (US$43.1 bn) from a prior 5.8% ($45.1 bn). JPMorgan wrote in last Friday’s Global Data Watch that the August deficit marked the country’s narrowest for August in 11 years and the narrowest overall in six years. Explaining the drop was an improved trade balance driven chiefly by a plunge in the value of imports—itself driven on the volume side by a sharply weakened Turkish lira and on the import price side by sharply lower international energy prices. Turkey’s August current account deficit was covered entirely by capital inflows; no reserves were lost.

Prices

Although September year-on-year U.S. headline consumer price inflation was nil, the core rate accelerated slightly to 1.9% from the August 1.8%. This number still falls short of the Fed’s 2% inflation target. Also, the rate for Fed’s preferred measure, core PCE, stood at only 1.3% in August.

Consumer price inflation in China slowed down sharply in September to 1.6% from the previous 2.0%. This slide gives leeway for monetary policy loosening already this quarter.

Policy: monetary

The near consensus within the FOMC to hike rates this year seems to be breaking down, with powerful Board of Governors members Lael Brainard and Daniel Tarullo and Federal Open Market Committee (FOMC) Vice Chairman and New York Fed President William Dudley cautioning so loudly against premature tightening that their speeches are being interpreted as a mini rebellion (see Brainard drops a policy bomb, by Tim Duy, and The Fed board is now seriously split, by Gavyn Davies). While we acknowledge that uncertainty is high and suffer from it ourselves, we hold to our call that the Fed will hike rates to 0.25–0.50% in March, not before.

We see the Fed as the only major developed market central bank likely to raise interest rates soon and expect the central banks of Japan and the euro area to extend or speed up quantitative easing in the next 15 months, with Japan’s moving first. For this week, we forecast that the European Central Bank (ECB) will leave rates and the pace of quantitative easing both unchanged from last month. By our reading of recent ECB communication, monetary policy committee members judge the current asset purchase program to be working.

In emerging markets, we anticipate loose monetary policy stances till the Fed hikes, then a slew of copycat rate hikes to protect currency valuations. An exception is the People’s Bank of China, which we think will cut rates and its required reserve ratio this quarter. This means that Brazil and Turkey on Wednesday will hold rates unchanged next week.

Policy: fiscal

The U.S. Congress has not yet suspended or raised the debt limit. The deadline has passed but the Treasury says it won’t run out of cash until about November 3. If not resolved soon, Treasury bond market volatility could rise. We would see that as a buying opportunity, for we gauge the risk of a default to be virtually zero.

Moody’s cut Brazil’s rating to BBB–, which is still one notch above junk status. It left its outlook negative. Moody’s specifically cited political uncertainty as a factor in its decision. Rousseff has been unable to pass a package of austerity measures amid the ongoing corruption scandal at Petrobras and her abysmal approval ratings. The deficit is at 9.2% of GDP in August; its gross debt is projected to rise to 70% of GDP this year, from 62% just two years ago. Standard & Poor’s now rates Brazilian sovereign debt junk, while Fitch and Moody’s continue to call it investment grade.

Politics

The USA still has no House speaker to replace John Boehner. The Republican party controls the lower chamber but is split into hardline conservatives who prefer ideological purity over actual governing and moderates who will cut deals with Democrats if need be to get things done.

Polls show that analysts and Democratic voters saw Hillary Clinton as having won the first Democratic Party debate. Vice President Joseph Biden has not yet decided whether to run. He would be a much more formidable contender than her current opponents are, as he matches her mastery of policy detail. Given the weak field of Republican candidates, we expect a Democrat to win the presidency again in 2016. But this view has no bearing on our market view and won’t till we also have a view on which parties will control the two legislative chambers. It’s too early for that.

Brazil’s Supreme Court made rulings that will make it harder for Congress to impeach President Dilma Rousseff. Her government is scrambling to squelch rumors that Brazil’s finance minister, Joaquim Levy, is about to resign. Brazil is experiencing stagflation resulting, in our view, from the popping of a private credit bubble, fiscal imprudence (which the central bank has had to offset by raising interest rates even in the face of economic weakness at first, contraction subsequently), weakened demand from China, and falling world commodity prices.

Geopolitics

Tensions remain high in Syria, where Russia could clash accidentally with the USA or its NATO ally, Turkey; and the South China Sea, where the U.S. Navy says it will send ships to patrol inside the 12 nautical miles of the “islands” China has built on top of reefs to make clear the U.S. position that these are international waters and hence must be kept open to a free flow of trade and navigation.  Although both these risks are small, they bear watching.

Next four weeks

Ongoing

  • China: Low inflation opens space for more monetary policy loosening. We anticipate both a rate cut and a cut in the required reserve ratio. Monetary policy meetings are not preannounced.
  • Middle East: Russia–U.S. and Russia–Turkey (a NATO member) could inadvertently clash in Syria. Probabilities are small.
  • South China Sea: China–USA could clash, as U.S. Navy ships approach islands built artificially by China. Probabilities are small.
  • USA: Budget crisis. Volatility could resurge in bond markets. The U.S. Treasury will run out of money around November 3 if Congress doesn’t raise the debt ceiling on time. This issue is entangled with the Republicans’ struggle to elect a House speaker now that John Boehner has announced his resignation from that job. No one seems to want the job. 

Tuesday 20

  • Mexico: Central bank reserves (prior week).

Wednesday 21

  • Brazil: Consumer price: IPCA (Sep, consensus: 9.7% y/y), monetary policy decision (TransEconomics and consensus: no change).
  • Japan: International trade: customs cleared (Sep). Expected to show a decline. This is a nominal indicator so it reflects changes in prices as well as volumes. Later this month, the Bank of Japan will report real trade. We expect both reports to show declines.
  • Mexico: Retail sales (Sep).
  • Turkey: Monetary policy decision (TransEconomics and consensus: no change). Even though y/y inflation has accelerated to 8% in September from 7.1% in August and 6.8% in July, the Central Bank of the Republic of Turkey will probably stay on hold till after the Fed raises rates.

Thursday 22

  • Brazil: Unemployment rate (Sep).
  • Euro Area: ECB monthly report, monetary policy decision. TransEconomics: No change. By our reading of recent ECB communication, monetary policy committee members judge the current asset purchase program to be working.
  • USA: FHFA house price index (Sep).

Friday 23

  • Euro Area: Markit services PMI (Sep, flash).
  • Global (Japan, USA, Euro Area): Markit manufacturing PMIs (Oct, flash).
  • Korea: GDP (Q3, first estimate).

Tuesday 27

  • Euro Area: Money supply (Sep).
  • Mexico: International trade (Sep).
  • UK: GDP (Q3, first estimate).
  • USA: Consumer confidence (Nov), FHFA house price index (Aug), Markit services PMI (Oct, flash).

Wednesday 28

  • USA: CNBCRepublican Debate among candidates running for president (7:00 PM Mexico City time). Candidate with at least 3% polling average appear in prime time, the rest in an undercard 5:00 PM.
  • Japan: Industrial production (Sep), Shoko Chukin survey of business sentiment (Oct).
  • USA: Monetary policy decision (TransEconomics and consensus: no change), durable goods orders (Sep), S&P/Case-Shiller house price index (Aug), Conference Board consumer confidence (Oct).

Thursday 29

  • Germany: Unemployment rate (Sep), CPI (Oct).
  • Japan: Industrial production (Sep), monetary policy decision (TransEconomics and consensus: no change). The Bank of Japan seems to be watching not its traditional core inflation measure, which excludes food alone, but rather one which excludes food and energy both. This more conventional measure of core inflation has risen to over 1%.
  • Korea: Industrial production, flash (Oct, flash).
  • Mexico: Monetary policy decision (TransEconomics and consensus: no change). Banco de México continues to signal that it will postpone hiking till the Fed does. Inflation pressures appear to be low, despite peso weakening from a year ago and low unemployment.
  • UK: Money supply (Sep).
  • USA: GDP (Q3, first estimate).

Friday 30

  • Euro Area: Unemployment rate (Sep).
  • Korea: Industrial production (Sep).
  • Russia: Monetary policy decision.
  • Spain: GDP (Q3, first estimate).
  • Turkey: Internationaltrade (Sep).
  • USA: Personal income (Sep), University of Michigan consumer confidence and inflation expectations (Oct, final).

Sunday November 1

  • Turkey: Parliamentary elections.

All week

  • USA: The Treasury runs out of money if Congress doesn’t raise its debt ceiling.

Monday 2

  • Global: Markit manufacturing PMI (Oct).
  • Korea: International trade (Oct), consumer price index (Oct), balance of payments (Oct).

Tuesday 3

  • Brazil: Markit manufacturing PMI (Oct), international trade (Oct).
  • Mexico: Markit manufacturing PMI (Oct).

Wednesday 4

  • Global: Markit services PMI (Oct).
  • Japan: Monetary policy meeting minutes (Oct 5–6).
  • Turkey: Consumer price index (Oct).
  • USA: International trade(Oct).

Thursday 5

  • Brazil: Markit services PMI (Oct).
  • Germany: Industrial production (Sep).
  • Russia: Markit services PMI (Oct).
  • UK: Monetary policy decision (TransEconomics and consensus: no change).

Friday 6

  • Euro Area: Industrial production (Sep).
  • UK: Industrial production (Sep), international trade (Sep).
  • USA: Unemployment rate and nonfarm payrolls (Oct), Fed’s Bullard.

Sunday 8

  • China: International trade (Oct). Imports & export both expected to drop.

Monday 9

  • Mexico: Consumer price index (Sep), consumer confidence (Nov).
  • Turkey: Industrial production (Sep).

10–15 November

  • China: Money supply (Nov).

10–16 November

  • India: International trade (Nov).

Tuesday 10

  • China: Consumer price index (Oct).
  • India: International trade (Oct).
  • Korea: Unemployment rate (Oct).
  • USA: Fox Business/WSJ Republican debate among candidates running for president.

Wednesday 11

  • China: Retail sales (Oct), fixed investment (Oct), industrial production (Oct).
  • Korea: Unemployment rate (Oct).
  • Turkey: Balance of payments (Sep).
  • UK: Unemployment rate (Sep).

Thursday 12

  • Euro Area: Industrial production (Sep).
  • Global: OPEC monthly oil market report.
  • India: consumer price index (Oct), industrial production (Sep).
  • Korea: Monetary policy decision.
  • Russia: GDP (Q3, first estimate).

Friday 13

  • Global: IEA release monthly oil market report.
  • Euro Area: GDP (Q3, first estimate).
  • Japan: Industrial production (Sep, final).
  • UK: RICS house price index. House prices are bubbling again in the UK. (Also in Canada.)
  • USA: Retail sales (Oct).

Saturday 14

  • USA: CBS NewsDemocratic Party primary debate among candidates running for president.

Comentarios: Deje su comentario.

Russia–NATO, U.S. budget, oil balances, U.S. retail sales, and IP

Genevieve Signoret

Macro Views

Next four weeks

Events in red are those most likely to shake markets.

All week

  • Middle East: Russia versus USA and Turkey (NATO) in Syria, Obama policy. Watch for signs of confrontation between Russia and the USA. Russia has intervened in Syria in support of Bashar al-Assad, whom the USA wants oust. Russia has bombed non-ISIS CIA-trained rebels and invaded the air space of NATO member Turkey. The Obama administration is rumored to be reconsidering its fuzzy Syria policy.
  • USA: U.S. struggle for replacement house speaker and looming deadline for raising the debt limit. U.S. House Speaker John Boehner wants to quit that post but can’t till a different Republican leader has emerged to take over. Meanwhile, the deadlines for raising the debt limit for the U.S. Treasury (early November) are approaching fast.

Monday 12 October

  • Global: OPEC oil market report (Sep). (See the Tuesday 13 entry: “IEA oil market report”.)
  • Euro Area: Eurogroup meeting.
  • India: Consumer prices (Sep), industrial production (Sep). Even a small month-on-month increase would bring year-on-year growth to over 5%. This would market the third month of acceleration since the June pace of just 2.5%.
  • Mexico: Industrial production (Aug),employment (Q3). Industrial output breaks down into manufacturing, construction, and mining. Analysts expect some industrial output year-on-year acceleration from its anemic July pace of 0.7%, especially in construction.

Tuesday 13

  • Global: IEA oil market report (Sep). Analysts are all over the map in their crude oil forecasts. Recently, Genevieve read in a 30-minute span one expert forecast that Brent would accelerate to $75/barrel next year, another say it would crash to below $20/barrel, and a third say it had stabilized. The IEA does not publish a price forecast but rather backward looking estimates and forward-looking projections of supply, demand, and stocks. Its numbers tend to sway markets more than do those of OPEC, whose monthly report generally comes out the same week and this month comes out the day before.
  • China: Foreign trade (Sep). Analysts expect China’s merchandise trade to have contracted last month on a year-on-year basis for the third month in a row. We don’t expect this bad news to cause market any surprise.
  • Japan: Money supply (Sep).
  • Korea: Unemployment rate (Sep).
  • UK: Consumer prices (Sep). Annual inflation is forecast to dip to 0.1% from nil and core inflation should accelerate slightly to 1.1%. The gap is explained chiefly by oil prices, as is the case in most developed economies, where gasoline prices tend to float freely. We now think that the UK will raise interest rates later than the Fed (it used to be the other way around).

Wednesday 14

  • USA: Retail sales (Sep). With gasoline prices down 4.6% over the month, this nominal indicator (the value, not the volume, of retail sales) can look weaker than it really is. Analysts project that healthy auto and auto part volumes will offset the drop in gasoline prices for a net change from August close to nil. Anything worse would be bullish for long-term U.S. Treasury securities and confirm our Fed call for March 2016.
  • China: Consumer prices (Sep).
  • Korea: Money supply (Sep).
  • Euro Area: Consumer prices (Sep, flash), industrial production (Sep).
  • UK: Unemployment rate (Sep).

Thursday 15

  • Korea: Monetary policy decision. Consensus: No change in the base rate from the current 1.50%.
  • Japan: Industrial production (Aug, final).
  • Euro Area: European Union summit.
  • USA: Consumer prices (Sep). Consensus: -0.1% y/y. Gasoline prices have plunged in the past year. Air fares have dropped recently. Healthcare prices are falling. If you’re asking yourself why the Fed is even considering a rate hike this year, read Genevieve’s brief explanation here and more detailed one here

Friday 16

  • Euro Area: Trade balance (Sep).
  • USA: Industrial production (Sep). TransEconomics: Contraction. Manufacturing is contracting world-wide.Mining activity down as oil and gas drilling drop in response to falling global prices. Utilities may be up, as temperatures varied widely in September. 

Monday 19

  • China: Industrial production (Sep), GDP (Q3).

Wednesday 21

  • Mexico: Retail sales (Sep).

Thursday 22

  • Korea: GDP (Q3, first estimate).
  • Euro Area: ECB monthly report, monetary policy decision.
  • USA: House prices (Sep).

Friday 23

  • Spain: Unemployment rate (Sep).

Tuesday 27

  • Euro Area: Money supply (Sep).
  • UK: GDP (Q3, first estimate).
  • USA: Consumer confidence (Nov), house prices (Aug), Markit composite PMI (Oct, flash).

Wednesday 28

  • Japan: Industrial production (Sep, flash).
  • USA: Fed interest rate decision.

Thurday 29

  • Korea: Industrial production (Oct, flash)
  • Japan: Unemployment rate (Oct), monetary policy decision.
  • Germany: Unemployment rate (Sep).
  • USA: GDP (Q3, first estimate).
  • Mexico: Monetary policy decision.

Friday 30

  • Turkey: Foreign trade (Sep).
  • Euro Area: Unemployment rate (Sep).
  • Spain: GDP (Q3, first estimate).
  • USA: Personal income (Sep).

Monday November 2

  • Global: Markit manufacturing PMI (Oct).
  • Korea: Trade balance (Oct), consumer prices (Oct).

Tuesday 3

  • Brazil: Markit manufacturing PMI (Oct), trade balance (Oct).

Wednesday 4

  • Japan: Monetary policy meeting minutes (Oct 5, 6).
  • Euro Area: Markit services PMI (Oct).
  • UK: Markit services PMI (Oct).
  • USA: Trade balance (Oct).

Thursday 5

  • Russia: Markit services PMI (Oct).
  • Germany: Industrial production (Sep).
  • UK: Monetary policy decision.
  • Brazil: Markit services PMI (Oct).

Friday 6

  • Euro Area: Industrial production (Sep).
  • UK: Industrial production (Sep).
  • USA: Unemployment rate (Oct), nonfarm payrolls (Oct), Fed’s Bullard Speak (2015, 2016).
Comentarios: Deje su comentario.

La Fed tiene ganas de normalizar

Genevieve Signoret

Este artículo es una traducción del artículo en inglés The Fed is itching to normalize, publicado originalmente en la edición de septiembre 2015 de la revista digital de la International Association of Financial Executives Institutes (IAFEI). Parafrasea y extiende el artículo Concuerdo con Tim Duy pero por otras razones.

Con la inflación de Estados Unidos por debajo y alejándose aún más del objetivo de la Fed de 2% y ninguna señal manifiesta de acumulación de presiones inflacionarias, ¿por qué el Comité Federal de Mercado Abierto (FOMC) del Sistema de la Reserva Federal (Fed) está considerando elevar, este año, su margen objetivo para la tasa de fondos federales en un cuarto de punto porcentual a 0.25-0.50% desde el valor actual de 0.00-0.25%? Creo que porque la Fed tiene ganas de normalizar.

Comencemos por explicar qué entiendo por normalizar. No me refiero a adoptar una postura de política monetaria restrictiva. Me refiero a cambiar el régimen de política monetaria. El régimen actual combina una política de tasa de interés cero (Zero Interest Rate Policies, ZIRP) con un balance desmesurado. Normalizar significa tener cualquier tasa que no sea igual a cero –con 0.25% o más bastaría– y reducir el balance.

Recuerden que la Fed comenzó a inflar su balance durante la crisis al comprar títulos de deuda de mediano y largo plazo (un haber para la Fed), pagando por ellos mediante la acreditación de depósitos bancarios comerciales en la Fed (conocidos como reservas y una deuda para la Fed). La Fed creó estas reservas de la nada. La idea era estimular la demanda por préstamos y la asunción de riesgos suprimiendo las tasas de interés de mediano y largo plazo, e impulsar la oferta de crédito inflando las reservas de los bancos comerciales.

Aunque a finales del año pasado la Fed completó la reducción (tapering) de su programa de compra de activos, aún no ha comenzado a permitir que su balance disminuya. La Fed puede reducir el balance pasivamente refrenándose de reemplazar los títulos de deuda en su portafolio cuando venzan. En cambio, ha reinvertido continuamente los pagos de capital en bonos comparables a los que han vencido. Por lo tanto, aunque mediante el “tapering”, el año pasado la Fed dejó gradualmente de agregar estímulo nuevo, no ha retirado aún el estímulo extraordinario que aplicó anteriormente.

La combinación actual de ZIRP más un balance abultado a $4.5 billones desde su tamaño normal de $800 mil millones es un régimen de política monetaria extraordinario establecido para evitar la deflación. Ahora, la tarea de la Fed consiste en pasar de este régimen extraordinario a uno nuevo normal.

Veamos qué implica esto. Esto no implicará un regreso al régimen previo a la crisis, que incluía el anuncio y la conducción por parte de la Fed de los mercados monetarios hacia una sola tasa de fondos federales objetivo. En cambio, incluirá cambiar a un margen objetivo (ya no un nivel objetivo) para la tasa de fondos federales, agregando dos tasas de interés nuevas, luego dejando una sola y en algún momento comenzar a permitir pasivamente que el balance se reduzca.

La normalización tardará años. La Fed la ha planificado meticulosamente y ha probado sus dos nuevos instrumentos escrupulosamente; ahora es cosa de esperar. Sospecho que el personal de la Fed tiene enormes ansias de poner manos a la obra. También percibo en los discursos de los miembros del FOMC que les preocupa que surjan presiones inflacionarias aún invisibles antes de que el FOMC tenga la oportunidad de implementar plenamente sus nuevas herramientas. Creo que los miembros sienten la urgencia de actuar. Y el primer paso para actuar consiste en reavivar el uso de la tasa de fondos federales aumentándola en un cuarto de punto porcentual. Un cuarto de punto es todo lo que se necesita.

Sin embargo, la Fed deberá enfrentar un desafío complejo: cómo comunicar a los mercados la normalización para evitar una sobrerreacción. Recordemos lo que pasó con el “tapering”. El término se refería no a un endurecimiento, sino más bien a una disminución gradual del ritmo mensual con el cual la Fed agregaba estímulo nuevo. Sin embargo, para muchos participantes del mercado, el “tapering” les pareció un eufemismo de endurecimiento. E incluso para los más expertos, era una tragedia, debido a que implicaba que el endurecimiento estaba cada vez más cerca. Estas impresiones generaron turbulencia.

Pero del mismo modo que el “tapering” no significó un endurecimiento, la normalización no significa necesariamente que la Fed adoptará una postura monetaria restrictiva en el futuro cercano. Requerirá un pequeño empuje, 25 puntos base será suficiente. Más allá de ello, en teoría, el rumbo futuro depende totalmente de los datos: la normalización puede conducir a una postura más restrictiva pero no es necesario que ello ocurra de inmediato, no si las condiciones macro no lo requieren.

Creo que esto es a lo que se refieren los miembros del FOMC cuando nos urgen a que dejemos de obsesionarnos por un alza de tan solo un cuarto de punto o el momento exacto de la misma. ¿Pero cómo persuadir a los mercados de esto? Tres factores lo complican:

Primero, aunque la Fed ha realizado pruebas piloto de sus dos herramientas nuevas –la tasa de interés sobre los excedentes de reservas (OER) y la tasa fija interdiaria de reporto inverso (ON RRP)– los mercados advierten correctamente que con estas dos tasas nuevas la Fed ingresa a un territorio desconocido.

Segundo, este Juego de herramientas totalmente nuevo para tiempos normales que he descrito anteriormente será complejo, pues involucrará tres tasas de interés al principio; luego dos; y el uso de un margen objetivo de tasas en vez de un solo nivel objetivo. Los mercados necesitarán un período de aprendizaje.

Tercero, la implementación expondrá a los mercados a varias novedades históricas: un alza de tasa inicial hasta un nuevo margen objetivo con la introducción de dos tasas nuevas para establecer un corredor; la subsiguiente eliminación gradual de una de las dos tasas nuevas; luego la reducción pasiva del balance. Los mercados detestan aventurarse hacia lo desconocido.

Sospecho que la Fed se desespera por lograr que esto cause la menor turbulencia posible en los mercados; yo creo que simplemente debiera lanzarse al agua y explicar e ilustrar el proceso en el camino. Al principio los mercados se retorcerán de incomodidad, pero a la larga “lo entenderán” y se tranquilizarán, tal como lo hicieron con el “tapering”.

Solidarizo con las (supuestas) preocupaciones de la Fed sobre que las reacciones del mercado probablemente serán desproporcionalmente tumultuosas con respecto a lo pequeño de la primera alza. Las matemáticas del alza de tasa demuestran esta sobrerreacción. Considere la tasa actual simplemente como 0%. Entonces, cualquier alza, por pequeña que sea, en términos porcentuales será infinitamente grande. Estamos hablando de cambios de régimen; lo que los matemáticos denominan una discontinuidad.

En resumen, creo que la Fed apenas puede contener su impulso por normalizar. Y que los mercados pensarán que normalizar significará un endurecimiento total cuando sólo implicará un mero cambio de herramientas. Y por lo tanto tendrán otro período de turbulencia.

Comentarios: Deje su comentario.

Revise FOMC forecast to December

Genevieve Signoret

Macro Views

We were not surprised by the FOMC’s decision to hold rates unchanged yesterday but were surprised by their frankness and that of Janet Yellen in her press conference with which they’ve admitted that China and market volatility are, today, important drivers of their decision making. We now expect the first interest rate hike to take place not in late October but rather mid-December.

Greece holds general elections on Sunday. Greece’s latest bailout package was approved overwhelmingly by Parliament. But one thing is promising to pass unpopular reforms and another is actually doing so. We don’t know who among the Greek candidates would be most effective at pushing them through. We expect no change in uncertainty levels over the still unresolved euro debt crisis. Just an update as to who’s in charge now and thus how to monitor this saga. For a quick background briefer, we recommend this, free from WSJ: What Does Greece’s Election Mean for Its Bailout?

We expect the Bank of Mexico to hold firm to its monetary policy rate of 3.00% on Monday 21 and until the FOMC hikes rates for the first time.

USA will publish its final estimate of quarter two GDP on Friday 25. We and the consensus anticipate no change from the prior estimate of 3.7%.

 

Next four weeks

Events in red are those most likely to shake markets.

 

Monday 21

  • Spain: Foreign trade (Jul).
  • Mexico: Monetary policy decision. TransEconomics: No change. We continue to expect Banxico to refrain from hiking as long as the Fed is doing so

Wednesday 23

  • Euro Area: Markit manufacturing & composite PMI (Sep, flash).
  • USA: Markit manufacturing PMI (Sep, flash).

Thursday 24

  • Japan: Consumer prices (Sep).
  • USA: Durable goods orders (Aug), unemployment claims.
  • Brazil: Unemployment (Aug).

Friday 25

  • Euro Area: Money supply.
  • USA: GDP (Q2, final estimate), Markit services & composite PMI (Sep, flash), Michigan consumer sentiment and inflation expectations (Sep, flash). TransEconomics and consensus: No revision to the U.S. GDP Q2 growth estimate of 3.7% q/q, saar.
  • Mexico: Foreign trade (Aug).

Monday 28

  • USA: Monetary policy speech: Evans (2015 voter), personal income (Aug).

Tuesday 29

  • Japan: Industrial production (Sep, flash).
  • USA: Consumer confidence (Oct).

Wednesday 30

  • China: Markit manufacturing PMI (Sep).
  • Korea: Industrial production (Sep).
  • Japan: Bank of Japan Tankan (Q3).
  • Euro Area: Unemployment rate (Sep).
  • UK: GDP (Q2, final)
  • USA: Monetary policy speeches: Yellen.
  • Mexico: Phase two of round one bidding for shallow oil and gas blocks. 14 players have qualified to bid. In the July 15 initial phase, a mere two blocks were awarded. Mexico’s oil output over the past 10 years has dropped by a million b/d to 2.3 mb/d

Thurday 1 October

  • Global: Markit manufacturing PMI (Oct).
  • Japan: Unemployment rate (Sep).
  • Korea: Foreign trade (Aug), consumer price index (Sep).
  • Russia: GDP (2Q, final).

Friday 2

  • USA: Unemployment rate and nonfarm payrolls (Sep), monetary policy speech: Fischer.

Monday 5

  • Global: Markit services PMI (Oct).
  • Mexico: Banxico monetary policy meeting minutes (29 Oct).

Tuesday 6

  • Euro Area: Eurogroup meeting.

Wednesday 7

  • UK: Industrial production (Sep).

Thursday 8

  • China: Markit services PMI (Oct).
  • UK: Federal Reserve monetary policy meeting minutes (16-17 Sep).

Friday 9

  • Global: World Bank annual meeting.
  • India: Foreign trade (Sep).
  • France: Industrial production (Oct).
  • Italy: Industrial production (Oct).

Monday 12

  • Global: OPEC oil market report (Sep).
  • Euro Area: Eurogroup meeting.
  • India: Consumer prices (Sep), industrial production (Sep).
  • México: Industrial production (Sep), employment (Q3).

Tuesday 13

  • Global: IEA oil market report (Sep).
  • China: Foreign trade (Sep).
  • Japan: Money supply (Sep).
  • Korea: Unemployment rate (Sep).
  • UK: Consumer prices (Sep).
  • USA: Retail sales (Sep).

Wednesday 14

  • China: Consumer prices (Sep).
  • Korea: Money supply (Sep).
  • Euro Area: Consumer prices (Sep, flash), industrial production (Sep).
  • UK: Unemployment rate (Sep).

Thurday 15

  • Korea: Monetary policy decision.
  • Japan: Industrial production (Sep).
  • Euro Area: European Union Summit.
  • USA: Consumer prices (Sep).

Friday 16

  • Euro Area: Trade balance (Sep).
  • USA: Industrial production (Sep).

Update History:

  • 29 September 2015: Wednesday 30:  Mexico: Phase two of round one bidding for shallow oil and gas blocks. 14 players have qualified to bid. In the July 15 initial phase, a mere two blocks were awarded. Mexico’s oil output over the past 10 years has dropped by a million b/d to 2.3 mb/d. 
Comentarios: Deje su comentario.

Nos sentimos más seguros ahora con respecto a la Fed

Genevieve Signoret

Perspectivas Macro

Nos sentimos más seguros ahora que hace dos semanas de que la Fed mantendrá su tasa objetivo de fondos federales en 0.00–0.25% el jueves 17 de septiembre. La volatilidad del mercado por sí sola ha endurecido las condiciones financieras, elevando el costo del capital y haciendo más peligroso asumir riesgos.

Con un alto nivel de incertidumbre, ahora prevemos que la Fed aumentará las tasas en octubre. Estamos dispuestos a desplazar este pronóstico hasta marzo de 2016 si para fines de septiembre vemos que la volatilidad sigue alta o que colapsan los indicadores macro de China.

Recuerden que la primera alza de la Fed es mucho más que una mera subida, es el inicio de la “normalización” (Genevieve explica esto con mayor detalle aquí). La Fed no sólo elevará muy levemente las tasas, sino también introducirá un nuevo juego de herramientas compuesto por un trío de tasas; nuestra conocida tasa de fondos federales dentro de una banda de dos tasas adicionales: la tasa fija interdiaria de reporto inverso (ON RRP) y la tasa de interés sobre las reservas excesivas.

Es cierto que a los mercados les preocupa que la Fed pueda endurecer prematuramente su postura, provocando ya sea una recesión global o, para evitarla, que se vea obligada a rectificarse con la consiguiente pérdida de credibilidad. Pero no es todo lo que les preocupa. También temen que la adopción por parte de la Fed del nuevo juego de herramientas cause confusión al principio. Estas dos tasas nuevas aún no se han probado a gran escala; y puede que la Fed deba realizar algunos ajustes al implementarlas por primera vez.

**************

Hemos actualizado nuestras tablas y supuestos de pronóstico. Ahora prevemos que China mostrará tasas de crecimiento no superiores a 7.0% en 2015 y 6.5% en 2016, y que al igual que la Fed, Banxico elevará las tasas en octubre, ya no en septiembre. La Fed anunciará su alza el 28 de octubre y Banxico lo hará al día siguiente. Esto traslada nuestro pronóstico de Banxico del tercer al cuarto trimestre para alinearlo con nuestro pronóstico de la Fed ya que, como hemos reiterado a menudo, Banxico aumentará sus tasas inmediatamente después que lo haga la Fed. Tengan presente que, si dilatamos nuestro pronóstico de la Fed desde octubre de 2015 a marzo de 2016, haremos lo mismo con Banxico.

Hemos actualizado el supuesto climático de nuestro escenario central para indicar que el episodio de El Niño será severo. Esto refuerza nuestra percepción de que los riesgos macro globales se inclinan más hacia la baja que cuando recién presentamos nuestro conjunto actual de escenarios.

Las próximas cuatro semanas

Events in red are those most likely to shake markets.

Monday 14 September

  • Japan: Monetary policy decision.
  • India: Consumer prices (Aug).
  • Euro Area: Industrial production (Jul).
  • Italy: Consumer prices (Aug).

Tuesday 15

  • Russia: Industrial production (Aug).
  • Turkey: Unemployment (Jun).
  • UK: Consumer prices (Aug).
  • France: Consumer prices (Aug).
  • USA: Retail sales (Aug), industrial production (Aug).

Wednesday 16

  • Japan: Foreign trade (Aug).
  • UK: Unemployment (Jul).
  • USA: Consumer prices (Aug).

Thursday 17

  • Russia: Unemployment (Aug), retail sales (Aug).
  • Italy: Foreign trade (Jul).
  • USA: Monetary policy decision.

Sunday 20

  • Greece: General elections

Monday 21

  • Spain: Foreign trade (Jul).
  • Mexico: Monetary policy decision.

Wednesday 23

  • Euro Area: Markit manufacturing & composite PMI (Sep, flash).
  • Germany: Markit manufacturing, services & composite PMI (Sep, flash).
  • France: GDP (Q2), Markit manufacturing, services & composite PMI (Sep, flash).
  • USA: Markit manufacturing PMI (Sep, flash).

Thursday 24

  • Japan: Consumer prices (Sep).
  • USA: Durable goods orders (Aug), unemployment claims.
  • Brazil: Unemployment (Aug).

Friday 25

  • Euro Area: Money supply.
  • USA: GDP (Q2, 3rd estimate), Markit services & composite PMI (Sep, flash), Michigan consumer sentiment and inflation expectations (Sep, flash).
  • Mexico: Foreign trade (Aug).

Monday 28

  • USA: Monetary policy speech: Evans (2015 voter), personal income.

Tuesday 29

  • Japan: Industrial production (Sep, flash).
  • Spain: Consumer price index (Sep, flash).
  • USA: Consumer confidence (Oct).

Wednesday 30

  • China: Markit manufacturing PMI (Sep).
  • Korea: Industrial production (Sep).
  • Japan: Bank of Japan Tankan (Q3).
  • Euro Area: Unemployment rate (Sep).
  • UK: GDP (Q2, final)
  • USA: Monetary policy speeches: Yellen.

Thurday 1 October

  • Global: Markit manufacturing PMI (Oct).
  • Japan: Unemployment rate (Sep).
  • Korea: Foreign trade (Aug), consumer price index (Sep).
  • Russia: GDP (1Q-2Q, final).

Friday 2

  • USA: Unemployment rate and nonfarm payrolls (Sep), monetary policy speech: Fischer.

Monday 5

  • Global: Markit services PMI (Oct).
  • Mexico: Banxico monetary policy meeting minutes (29 Oct).

Tuesday 6

  • Euro Area: Eurogroup meeting.

Wednesday 7

  • Germany: Industrial production (Sep).
  • UK: Industrial production (Sep).
  • Spain: Industrial production (Sep).

Thursday 8

  • China: Markit services PMI (Oct).
  • UK: Federal Reserve monetary policy meeting minutes (16-17 Sep).

Friday 9

  • Global: World Bank annual meeting.
  • India: Foreign trade (Sep).
  • France: Industrial production (Oct).
  • Italy: Industrial production (Oct).
Comentarios: Deje su comentario.

We feel surer now about the Fed

Genevieve Signoret

Macro Views

We feel surer now than we did two weeks ago that the Fed will hold its target federal funds rates at 0.00–0.25% on Thursday 17 September. Market volatility on its own has tightened financial conditions, raising the cost of capital and rendering risk taking more treacherous.

With high uncertainty, we now forecast that the Fed will hike in October. We’re poised to switch that call to March 2016 if by the end of September we see volatility still high or Chinese macro indicators collapsing.

Remember that the first Fed hike is not just a hike, it’s the start of “normalization” (Genevieve explains this more fully here). The Fed will not only ever so slightly raise rates but also introduce a new tool kit consisting of a trio of rates—the familiar federal funds rate inside a band of two additional rates: the overnight reverse repo rate (ON RRP)  and the interest rate on excess reserves.

It’s true that markets worry that the Fed may tighten prematurely, sparking either a global recession or, to prevent one, being forced to backtrack later with its credibility depleted. But that’s not all they worry about. They fear also that Fed adoption of its new tool kit may cause havoc at first. These two new rates are yet untested on a large scale; the Fed may flail around a bit when first deploying them.

**************

We have updated our forecast tables and assumptions. We now expect China to post growth rates no higher than 7.0% in 2015 and 6.5% in 2016 and for Banxico, like the Fed, to raise rates in October, no longer September. The Fed will announce on October 28 and Banxico will do so the very next day. This moves our Banxico call to quarter four from quarter three to align with our call for the Fed given our view repeated often here that Banxico will hike immediately after the Fed does. Note that, if we end up switching our Fed call from October 2015 to March 2016, we’ll follow suit for Banxico.

We’ve updated our central scenario climate assumption to state that the El Niño episode will be severe. This reinforces our perception that global macro risks are more acutely skewed to the downside than they were back last January when we first laid out our current set of scenarios.

Next four weeks

Events in red are those most likely to shake markets.

Monday 14 September

  • Japan: Monetary policy decision.
  • India: Consumer prices (Aug).
  • Euro Area: Industrial production (Jul).
  • Italy: Consumer prices (Aug).

Tuesday 15

  • Russia: Industrial production (Aug).
  • Turkey: Unemployment (Jun).
  • UK: Consumer prices (Aug).
  • France: Consumer prices (Aug).
  • USA: Retail sales (Aug), industrial production (Aug).

Wednesday 16

  • Japan: Foreign trade (Aug).
  • UK: Unemployment (Jul).
  • USA: Consumer prices (Aug).

Thursday 17

  • Russia: Unemployment (Aug), retail sales (Aug).
  • Italy: Foreign trade (Jul).
  • USA: Monetary policy decision.

Sunday 20

  • Greece: General elections

Monday 21

  • Spain: Foreign trade (Jul).
  • Mexico: Monetary policy decision.

Wednesday 23

  • Euro Area: Markit manufacturing & composite PMI (Sep, flash).
  • Germany: Markit manufacturing, services & composite PMI (Sep, flash).
  • France: GDP (Q2), Markit manufacturing, services & composite PMI (Sep, flash).
  • USA: Markit manufacturing PMI (Sep, flash).

Thursday 24

  • Japan: Consumer prices (Sep).
  • USA: Durable goods orders (Aug), unemployment claims.
  • Brazil: Unemployment (Aug).

Friday 25

  • Euro Area: Money supply.
  • USA: GDP (Q2, 3rd estimate), Markit services & composite PMI (Sep, flash), Michigan consumer sentiment and inflation expectations (Sep, flash).
  • Mexico: Foreign trade (Aug).

Monday 28

  • USA: Monetary policy speech: Evans (2015 voter), personal income.

Tuesday 29

  • Japan: Industrial production (Sep, flash).
  • Spain: Consumer price index (Sep, flash).
  • USA: Consumer confidence (Oct).

Wednesday 30

  • China: Markit manufacturing PMI (Sep).
  • Korea: Industrial production (Sep).
  • Japan: Bank of Japan Tankan (Q3).
  • Euro Area: Unemployment rate (Sep).
  • UK: GDP (Q2, final)
  • USA: Monetary policy speeches: Yellen.

Thurday 1 October

  • Global: Markit manufacturing PMI (Oct).
  • Japan: Unemployment rate (Sep).
  • Korea: Foreign trade (Aug), consumer price index (Sep).
  • Russia: GDP (1Q-2Q, final).

Friday 2

  • USA: Unemployment rate and nonfarm payrolls (Sep), monetary policy speech: Fischer.

Monday 5

  • Global: Markit services PMI (Oct).
  • Mexico: Banxico monetary policy meeting minutes (29 Oct).

Tuesday 6

  • Euro Area: Eurogroup meeting.

Wednesday 7

  • Germany: Industrial production (Sep).
  • UK: Industrial production (Sep).
  • Spain: Industrial production (Sep).

Thursday 8

  • China: Markit services PMI (Oct).
  • UK: Federal Reserve monetary policy meeting minutes (16-17 Sep).

Friday 9

  • Global: World Bank annual meeting.
  • India: Foreign trade (Sep).
  • France: Industrial production (Oct).
  • Italy: Industrial production (Oct).
Comentarios: Deje su comentario.

Fed hike in October

Genevieve Signoret & Alejandro Carrión

Macro Views

After prolonged agony, we have shifted our forecast for the timing of the first Fed hike to October from September. We premise this forecast on the assumption that markets will start recovering in October and U.S. macro data will continue to signal expansion, especially in the service sector.

Why the change? We think that the Fed believes that its first rate hike will cause short-term volatility, possibly sharp, and won’t want to add one more source of volatility to a market undergoing correction.

Why so soon? We believe that the Fed is very eager to start normalizing.

More details on our evolving view can be found in this week’s edition of Letter from the President: “Six questions about the ongoing volatility”, Fixed income: “Fed hike in October”, and “I agree with Tim Duy but my reasons differ”.

Next four weeks

Events in red are those most likely to shake markets.

August 27-29

  • USA: Federal Reserve annual economic policy symposium in Jackson Hole

Monday 31

  • Japan: Industrial production (Jul, flash).
  • Korea: Industrial production (Jul), consumer price (Aug).
  • India: GDP (Q2).
  • Turkey: Foreign trade (Aug).
  • Italy: Consumer price (Aug, flash).

Tuesday 1 September

  • China: Markit manufacturing PMI (Aug).
  • Korea: Foreign trade (Aug).
  • Russia: Markit manufacturing PMI (Aug).
  • Turkey: Markit manufacturing PMI (Aug).
  • Euro Area: Markit manufacturing PMI (Aug), unemployment (Aug).
  • UK: Markit manufacturing PMI (Aug).
  • Germany: Markit manufacturing PMI (Aug), unemployment (Aug).
  • France: Markit manufacturing PMI (Aug).
  • Italy: Markit manufacturing PMI (Aug).
  • Spain: Markit manufacturing PMI (Aug).
  • USA: Markit manufacturing PMI (Aug).
  • Brazil: Markit manufacturing PMI (Aug), foreign trade (Aug).
  • Mexico:Remittances (Jul), Banxico economic survey (Jul), IMEF manufacturing PMI (Aug), IMEF nonmanufacturing PMI (Aug), ordinary legislative session begins in Mexico, presidential Informe.

Wednesday 2

  • USA: Factory orders (Jul), Beige Book.
  • Brazil: Bank of Brazil monetary policy decision, industrial production (Jul).

Thursday 3

  • China: Markit services PMI (Aug).
  • Korea: GDP (Q2, flash).
  • Russia: Markit services PMI (Aug).
  • Turkey: Consumer price (Aug).
  • Euro Area: Markit services & composite PMI (Aug), ECB monetary policy decision and statement
  • UK: Markit services PMI (Aug).
  • Germany: Markit services PMI (Aug).
  • France: Markit services PMI (Aug)
  • Italy: Markit services PMI (Aug).
  • Spain: Markit services PMI (Aug).
  • USA: Unemployment claims, foreign trade (Aug), Markit services & composite PMI (Aug).
  • Brazil: Markit services & composite PMI (Aug).

Friday 4

  • Russia: Consumer prices (Aug).
  • USA: Employment report (Aug).

Monday 7

  • China: Foreign trade (Aug).
  • Japan: GDP (Q2).
  • Germany: Industrial production (Jul).
  • Italy: Consumer prices (Aug)

Tuesday 8

  • China: Consumer prices (Aug).
  • Korea: Unemployment (Aug).
  • Russia: GDP (2Q, flash).
  • Turkey: Industrial production (Jul).
  • Germany: Foreign trade (Jul).
  • France: Foreign trade (Jul).

Wednesday 9

  • India: Foreign trade (Aug).
  • UK: Industrial production (Jul), foreign trade (Jul).
  • Mexico: Consumer prices (Aug).

Thursday 10

  • Japan: Foreign trade (Jul).
  • Turkey: GDP (Q2).
  • UK: Bank of England monetary policy decision.
  • France: Industrial production (Jul).

Friday 11

  • Korea: Bank of Korea interest rate decision.
  • India: Industrial production (Jul).
  • Euro Area: Euro group meeting in Brussels.
  • Germany:Consumer prices (Aug, flash).
  • Italy: Industrial production (Jul).
  • Spain: Consumer prices (Aug, flash).
  • Mexico: Industrial production (Jul).

Monday 14

  • Japan: Bank of Japan annual rise in monetary base.
  • India: Consumer prices (Aug).
  • Euro Area: Industrial production (Jul).
  • Italy: Consumer prices (Aug).

Tuesday 15

  • Russia: Industrial production (Aug).
  • Turkey: Unemployment (Jun).
  • UK: Consumer prices (Aug).
  • France: Consumer prices (Aug).
  • USA: Retail sales (Aug), industrial production (Aug).
  • Mexico:Deadline for Mexican president to deliver 2016 budget proposal.

Wednesday 16

  • Japan: Foreign trade (Aug).
  • UK: Unemployment (Jul).
  • USA: Consumer prices (Aug).

Thursday 17

  • Russia: Unemployment (Aug), retail sales (Aug).
  • Italy: Foreign trade (Jul).
  • USA: Fed’s interest rate decision.

Sunday 20

  • Greece: General elections

Monday 21

  • Spain: Foreign trade (Jul).
  • Mexico: Banxico interest rate decision.

Wednesday 23

  • Euro Area: Markit manufacturing & composite PMI (Sep, flash).
  • Germany: Markit manufacturing, services & composite PMI (Sep, flash).
  • France: GDP (Q2), Markit manufacturing, services & composite PMI (Sep, flash).
  • USA: Markit manufacturing PMI (Sep, flash).

Thursday 24

  • Japan: Consumer prices (Sep).
  • USA: Durable goods orders (Aug), unemployment claims.
  • Brazil: Unemployment (Aug).

Friday 25

  • Euro Area: Money supply.
  • USA: GDP (Q2, 3rd estimate), Markit services & composite PMI (Sep, flash), Michigan consumer sentiment and inflation expectations (Sep, flash).
  • Mexico: Foreign trade (Aug).

Update History:

  • 2 September 2015: Thursday 15:  …to deliver 2015 2016 budget proposal.
Comentarios: Deje su comentario.

I agree with Tim Duy but my reasons differ

Genevieve Signoret

Tim Duy speculates as to what it would mean if the FOMC hiked rates by 25 basis points to 0.25–0.50% on September 17 even though inflation is below and diverging away from the 2% Fed target and no observable signs have emerged that inflation pressures are building. He argues that an initial 25 basis-point lift-off in the federal funds target range would in fact be meaningful despite its small magnitude, as it would teach us something new about the Fed’s reaction function—in particular, that the Fed had increased its confidence around its 5.0–5.2% estimate of the natural rate of unemployment. If the Fed hikes already in September even while inflation is drifting down away from the Fed target of 2%, he reasons, it can only be that the Fed is becoming convinced that the unemployment rate is nearly low enough to render consumer price acceleration inevitable. I agree with Tim that a 25-basis-point rate hike would be a meaningful market event, but my reasons differ.

I agree that, based on the unemployment rate, FOMC members figure that inflationary pressures so far invisible must be building. Up to here my thinking matches that of Tim. But, unlike Tim, I don’t think that their views on labor market slack is the primary force driving their eagerness to hike. I think it’s their strong urge to normalize.

I understand normalize to mean instigate a policy regime switch from the Fed’s current tool kit built for a liquidity trap (ZIRP plus balance sheet size) not back to the old one (a target federal funds target rate) but rather to a new, more sophisticated freshly designed one (three rates at first, including the federal funds rate; later, two).

Normalizing is a project to the Fed looming large and lengthy. They have planned it meticulously. Tested tools scrupulously. Waited for months. Now not only are staffers chomping at the bit operationally, but also FOMC members fret that hidden inflation pressures may cause an unforeseen eruption before they’ve become agile at deploying their new tools. They feel an urge to act, and step one is revive the federal funds rate. 25 basis points is all it would take; it’s enough to launch.

A thorny challenge lies ahead, however: how to communicate with markets about normalization so as to prevent an overreaction. Think back to tapering. The term referred not to tightening but rather to a gradually winding down of the monthly pace at which the Fed added new stimulus. Yet, to many market participants, tapering sounded like a euphemism for tightening. And, even for savvier ones, it spelled doom, as it meant that actual tightening now loomed closer. These thoughts triggered a tantrum.

But, just as tapering did not mean tightening, normalizing does not mean that the Fed will necessarily adopt a tight monetary stance any time soon. It will require a small lift up off the floor, but 25 basis points will do it. Beyond 25 basis points, in theory, the future path is data dependent entirely: normalization can lead to a tight stance but need not do so right away, not if macro conditions don’t warrant it.

This I think is what FOMC members mean when they urge us to stop obsessing over 25 basis points. But how to explain this to markets? Their task is tough, for three reasons:

First, although the Fed has pilot-tested its two new tools, the interest rate on excess reserves (OER) and the ON RRP facility, markets correctly note that the Fed is moving into uncharted territory.

Second, New Toolkit for Normal Times is complex: three rates at first; two later on; a target range.

Third, implementation involves a series of first-time events: an initial rate hike to a new target range with the introduction of two new rates to establish a corridor; a subsequent phasing out of one of the two new rates; passive shrinkage of the balance sheet.

I think the Fed despairs of making this market-smooth—they figure they must simply take the plunge, explaining and illustrating as they go. Markets will writhe and yelp in discomfort at first, yes, but eventually “get it” and settle down, just as they did weeks into tapering.

I must say, I sympathize with (my imagined) Fed fretting that market reactions to liftoff probably will prove tumultuous in disproportion to the wee size of the first hike. Rate hike math captures this overreaction. Think of the current rate as simply 0%. Then, any hike, no matter how small, in percentage terms is infinitely large. We’re talking about regime change here; discontinuity.

In short, Tim Duy and I agree that a 25–basis-point hike in September even while inflation’s low and drifting down would matter but differ as to why. He thinks it would tell us something new about the Fed’s reaction function. I say it would mean the Fed could contain its urge to normalize no longer. And that markets will think normalize means go all the way tight when in fact it means merely change tools. And will throw another tantrum.

Comentarios: Deje su comentario.