Finance Basic To Advance Level Knowledge

The Fed needs to start worrying more about the flattening treasury yield curve.  Bloomberg is reporting that bond traders are getting ready for a yield curve inversion as soon as next week .  One fixed income manager quoted in the article had this to say:  If the Fed decides to move more this year, I think it’s inevitable that the curve inverts and I think it will be a mistake,” said Colin Robertson, managing director of fixed income at Northern Trust Asset Management... He sees greater than a 50 percent chance of the 2- to 10-year spread inverting if the Fed raises rates once more this year, and if the central bank follows its projections and hikes twice more, Robertson sees inversion as a lock. Here is what the 10-year minus 2-year spread currently looks like:  The yield curve spread is definitely heading down, but is it truly on the cusp of an inversion? It is hard to know for sure, but there are two big clues suggesting the answer is yes. Fi...

Ever since his confirmation hearings, Fed Chair Jay Powell has struck me as an ordinary, plainspoken person. This week I was reminded of this trait at his FOMC press conference and  tweeted this statement : This impression is consistent with reports from last year when he was being considered for Fed chair: [F]riends and former colleagues of Powell's describe him as “annoyingly normal.” He lives in Chevy Chase, Md., and often rides his bike about eight miles from home to the Fed. He doesn't drink much, plays golf and the guitar, and has an odd ability to repeat people's sentences backward to them, a quirk former colleagues say is a reminder of his smarts — and how closely he listens. I bring this up because Jeanna Smialek of Bloomberg has a new article that nicely captures this feature of Jay Powell. The title of her piece is Powell Styles Himself a Fed Chairman for the People . Here are some excerpts: Alan Greenspan famously said he’d mastered the art of mumbl...

James Bullard and Ricardo DiCecio have a new paper where they model wealth, income, and consumption inequality.  They also incorporate fixed-price nominal debt contracts.  They then derive the optimal monetary policy for the masses in such a model. Here is what they find: This paper builds upon the risk-sharing view of NGDP targeting. The basic idea is that in a world of fixed-price nominal debt contracts (i.e. the real world), a NGDP level target provides better risk sharing among creditors and debtors against economic shocks than does a price stability target.   This is because a NGDP level target makes inflation countercyclical. During recessions, inflation rises and causes creditors to bear some of the unexpected pain by lowering the real debt payments they receive from debtors. During booms, inflation falls and allows creditors to share in some of the unexpected gain by increasing the real debt payments they receive from debtors. Debtors, in other...

Check out the figure below. It has nominal GDP plotted for three countries, normalized to 100 in 2007. The first country (black line) has kept nominal GDP on  a stable growth path over the entire period. The second country (red line) saw its nominal GDP growth path permanently decline in 2008-2009 but has since stabilized its growth rate.  The third country (blue line) had its nominal GDP growth path collapse and has only recently seen it grow past its its 2008 peak value.  So we see three very different paths of a nominal variable that should be controlled by monetary authorities over long periods, like that depicted in the chart. Consequently, not only are we seeing a tale of three different nominal GDP growth paths, we are also see a tale of three very different central banks policies.  Can you guess what countries are represented by the three different lines? 

The Sovereign Money Referendum  Sovereign banking will not happen in Switzerland. The referendum to end fractional reserve banking and turn all money creation over to the Swiss National Bank (SNB) central bank failed by a wide margin  on Sunday. This rejection is not a surprising result, given the polls going into the vote . There never was much chance the so-called Vollgeld plan would would pass.  Still, the sovereign money referendum was useful in that it generated new discussions on the benefits and costs of opening up the central bank's balance sheet to the public. In the United States, there had already been some debate surrounding the  opening up of the Fed's balance sheet to non-bank financial firms  in response to the financial crisis. Depending on who you asked, this "creeping nationalization" of financial intermediation was either concerning or a step in the right direction toward safer money. The Swiss vote was good, therefore, in that it fur...