Finance Basic To Advance Level Knowledge

The quote in the title should be the motto for the 2018-2019 FOMC. For the FOMC is set to raise its interest rate target next week and expected to raise it several times more in 2019 despite a flattening treasury yield curve. As seen in the above chart, the outright inversion of the treasury yield typically leads to a recession.  Despite this robust pattern , a growing number of Fed officials have become emboldened in their dismissal of it "since this time is different."  As  Caroline Baum notes,  In April, John Williams acknowledged that an inverted yield curve is “ a powerful signal of recessions, ” based on a significant body of research , including that by staff economists at his former bank.  By September, Williams was already disavowing that signal . “I don’t see the flat yield curve or inverted yield curve as being the deciding factor in terms of where we should go with policy,” Williams said following a speech in Buffalo on Sept. 6.  ...

In an  earlier post and Bridge article , I discussed some ways to use nominal GDP (NGDP) as a cross-check on the FOMC "navigating  by stars" of r*, u*, and y*. The  motivation for these pieces was Fed Chair Jay Powell's concerns about the challenge of using these star variables when they seem increasingly in flux. Here, again, is a key excerpt from his talk : Navigating by the stars can sound straightforward. Guiding policy by the stars in practice, however, has been quite challenging of late because our best assessments of the location of the stars have been changing significantly… the FOMC has been navigating between the shoals of overheating and premature tightening with only a hazy view of what seem to be shifting navigational guides. The Fed chair is implicitly challenging us to find indicators that shed light on the stance of monetary policy without having to know r*, u*, and y*. The metric I suggested in the earlier pieces was the "sticky-forecast" ...

Are the days of the Fed's floor system numbered? Last month I claimed that they could be if President Trump's fiscal policy continues to spawn rapid increases in the issuance of treasury bills. His administration is relying heavily on treasury bills to finance its deficits as seen below: This increased issuance of treasury bills matters because it implies, all else equal, a rise in treasury bill yields. Below is a figure showing the  DTCC overnight treasury-repo rate  relative to the IOER rate. Lately, the treasury-repo rate has been bouncing  above the interest on excess reserves (IOER) rate. This development could be a big deal. If sustained, this rise of overnight interest rates above the IOER rate could spell the end of the Fed's floor system.  To see why, recall that the Fed moved to a floor operating system in late 2008 by paying interest on excess reserves (IOER) at a rate higher than comparable short-term market interest rates. T...

I have a new article over at The Bridge   where I piggyback off of Jay Powell's  recent speech about the challenges of the Fed 'navigating' by the stars of  r*, u*, and y*. His concern is how to use them when they seem to be moving a lot: Navigating by the stars can sound straightforward. Guiding policy by the stars in practice, however, has been quite challenging of late because our best assessments of the location of the stars have been changing significantly… the FOMC has been navigating between the shoals of overheating and premature tightening with only a hazy view of what seem to be shifting navigational guides. Here is a chart I made for the piece that did not make the final cut. It shows the changing range of FOMC estimates for u* and the actual unemployment rate (u). I also added some red-lettered commentary on the chart to highlight the varying levels of FOMC concern about the gap between u and u*: Okay, so what is the FOMC to do with all the...