The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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October 31, 2005

Personal Income And Outlays: A Little Less Spending, A Little More Inflation

From Bloomberg:

U.S. consumer spending dropped for a second month in September when adjusted for inflation, the first back-to-back decline in 15 years and a sign that rising fuel costs left Americans with less money for other purchases.

Personal spending adjusted for inflation, which strips away the rise in energy prices, fell 0.4 percent after falling 1 percent in August, the Commerce Department said today in Washington. Before the adjustment, spending rose 0.5 percent after a 0.5 drop in August. Incomes rebounded from a plunge in August caused by uninsured losses from Hurricane Katrina...

Because spending rose less than incomes, the saving rate improved to minus 0.4 percent from minus 1 percent the previous month.

The Dallas Fed has more detail on that inflation bit:

The trimmed-mean PCE inflation rate for September was an annualized 2.9 percent.

According to the BEA, the overall PCE inflation rate for September was 11.7 percent,   annualized, while the inflation rate for PCE excluding food and energy was 2.4 percent.

The trimmed-mean statistic -- an alternative to the PCE excluding food and energy measure of core inflation -- increased at about the same, relatively high rate as in August. The result is that this measure of core is drifting north a bit faster than the more conventional "ex food and energy" statistic:


12-month PCE inflation

                                            Apr    May   June  July   Aug  Sep

PCE                                       2.9    2.5    2.2    2.6   3.0   3.8

PCE excl.
food and energy                    2.0     2.0   1.9    1.9    2.0   2.0      

Trimmed mean                      2.2     2.1   2.1    2.1    2.2   2.3

At Angry Bear, Kash doesn't like the slowing growth and the fact that "the risk of a coming upturn in the core rate of inflation seems real." And who can blame him. On the other hand, we suspected that September was going to be a mess, and the news has generally been pleasantly mixed of late -- the October National Association of Purchasing Managers report from the Chicago area being a case in point.  So tonight we'll just enjoy our sugar buzz, and wait to see what tricks or treats tomorrow (and the Institute for Supply Management manufacturing activity index) brings.

UPDATE: The Skeptical Speculator has more.      

October 31, 2005 in Data Releases, Inflation | Permalink


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Funds Rate Probabilities: Marching Toward 4.5

Mark Thoma already relayed the news -- no surprise to anyone -- that the market absolutely knows another 25 basis points are coming when the FOMC meets tomorrow.  So you need not sit down before taking in this picture of market expectations (based, as usual, on the Carlson-Craig-Melick estimates derived form options on federal funds futures):


December and January are a bit more interesting.  The reticence to bet on 25 basis points again-again-and-again, which appeared to be building ten days ago, faded right away last week:



To paraphrase the most recent survey of bond traders from Bloomberg (via Economist's View): The end may be in sight, but it is not near.

For the faithful, the data:

Download implied_pdf_november_102805.xls
Download implied_pdf_december_102805.xls
Download implied_pdf_january_102805.xls
Download Imp_pdf_slides_for_blog_102805.ppt    

October 31, 2005 in Fed Funds Futures | Permalink


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» Autos continue to tank from Econbrowser
The worst October for U.S. auto sales in the last 13 years, it was. [Read More]

Tracked on Dec 11, 2005 10:01:08 AM


The fed fund rate increase to 4 percent will be last rate increase for some time. Kindly visit the Economic Fractalist...

1 November 2005 Update

52/130/130 Maximum Daily Growth Fractal Completed.

Like a plane that has gone off the radar screen, the venerable Atlanta
based superairliner Delta Airlines, formerly DAL, no longer has a
valuation tracing on Big Charts. Delta, Northwestern, GM, Delphi, and
Ford all share the commonality that, unlike the badly run corporate-like entity
known as the United States, they cannot directly tax present day and future day
citizens to maintain the current questionable promise of their substantial outstanding
debt instruments. These private organizations must depend on bottom line profitability in a disequilibric competitive global economy to maintain the promise of their debt instruments,
their pensions, their health care benefits, and ultimately their economic viability.
The nonlinear reality of bankruptcy or imminent bankruptcy and the imminent death
of these formerly world class and solid companies serve as canaries in the coal mine for America's future global economic viability.

The nonlinear mechanistic imminent fractal decay of equities and asset valuations is, with great probability, at hand. 31 October 2005 completed or nearly completed a maximum growth fractal sequence of x/2.5x/2.5x or 52/129-130/129-130 days dating from August
2004. A lower high exhaustion gap so technically characteristic of
dying markets making their lower highs occurred on 31 October for the
NASDAQ. Before falling back at the close the Wilshire TMWX, likewise,
showed minutely exhaustion gaps to lower highs in the last hour of

The final decay daily fractal equity sequence will likely either be a
6/15/15 or a 7/17/17 sequence, the former starting 3 days ago and the
latter starting 4 days ago. (The other possibility is a splitting of
the difference with a 6 plus/16/16 decay sequence as alluded to in the
previous EF posting).

One other less likely, although nostalgic solution, is an exact
replay of the 1929 11/27/27 decay fractal sequence. The count on this
possible sequence is: 11/19 of 27/27. This has some appeal because
maximum growth in the second decay fractal would be a fib ratio of the
base, i.e., 1.62 x11 = 18-19 days.

All of these fractal decay solutions end in 31 to 35 more trading days
for completion of the primary decay fractal.

A corroborative litmus test in the next few days for the coming equity
devolution could be an expected decline in TNX and TYX, the ten year
note and 30 year bond respectively, even as the fed fund rate is
raised (albeit, very temporarily) to 4 percent. Exiting money from
equities, will flow into the debt market, lowering interest rates.
Likewise, three month treasuries IRX 'struggling' to match the 4
percent fed fund rate because of the money exiting from equities will
also provide early evidence that the devolution is in its beginning

Just like the formation of galaxies and hurricanes and nautilus
shells, the universe of the macroeconomy operates through non stochastic fractal
growth progression and nonlinear decay. Expect the unexpected.
Gary Lammert http://www.economicfractalist.com/

Posted by: gary lammert | November 01, 2005 at 05:35 PM

Yes, the December is more interesting. The strategy used there must have been different from the other months.

Posted by: Richard Davis | September 27, 2012 at 05:59 AM

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October 28, 2005

The Opposite Of The "S Word"

I have a confession to make.  Somewhere deep down in my 70s-infected soul, I have been dreading the day when the evidence would make an unmistakable move in the direction of declining real economic activity coupled with an acceleration in the inflation trend.  It didn't happen today.

From Reuters:

The U.S. economy grew at a stronger-than-expected 3.8 percent annual rate in the third quarter, the government reported on Friday, shaking off the drag from two hurricanes and rising energy prices.

"Shaking off" is right, and it is really pretty amazing.  So maybe we at least had some bad inflation news? 

Nope.  From Bloomberg...

The GDP report's personal consumption expenditures index that excludes food and energy, a measure favored by Fed policy makers, rose at a 1.3 percent annual rate, the slowest since the second quarter of 2003.

... and from CNNMoney:

The increase in the Employment Cost Index, a broad gauge of what employers pay in wages and benefits, marked a slight acceleration from the second quarter's 0.7 percent advance, the Labor Department said.

But over the past 12 months, total employment costs have risen just 3.1 percent, the smallest gain in six years, as wages grew only 2.3 percent, the smallest rise on record.

The last bit of news is a mixed blessing, in that the report "also showed workers losing ground to inflation."   And if you insist, you can get your fill of dreary economic news by checking out The Skeptical Speculator's summary of the September durable goods orders report.  Or the updated consumer sentiment index from the University of Michigan.

All in all, though, it wasn't a bad day.


Kash says the economy is "still cruising along at a reasonable rate." 
Mark Thoma notes "the economic news is not unambiguously positive from labor's perspective."
VoluntaryXchange gives the third quarter a B.
William Polley draws attention to the fact that businesses were still drawing down inventories.
Barry Ritholtz reminds us that there will be revisions.

UPDATE: James Hamilton gives the news a thumbs-up, and has a nice picture of the growth in the GDP components. pgl follows-up on Kash's post, and fears that the growth in consumption and government purchases means yet lower saving.  The Capital Spectator wonders what it all means for monetary policy.  Steve at Deinonychus antirrhopus focuses on the tepid labor compensation growth.  pgl follows-up on Kash's post, and fears that the growth in consumption and government purchases means yet lower saving.  The Skeptical Speculator does its usual wonderful job of putting things in a global context.

UPDATE 2: The Prudent Investor is not gladdened by the prominent role of government spending.

UPDATE 3: Mike Shedlock tries his hand at headline writing.

October 28, 2005 in Data Releases | Permalink


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» New GDP data and recession probabilities from Econbrowser
The Bureau of Economic Analysis yesterday released its advance estimates for the third quarter, reporting real GDP grew at an annual rate of 3.8%. [Read More]

Tracked on Oct 29, 2005 4:00:06 PM


Yet the Democrats will tell you they don't want to extend the tax cuts, and that the economy is performing poorly. There are still homeless people, the Bush administration, like Reagan, wants to take away food from children, and money from seniors.

The American economy is truly amazing. The government should get out of the way, and not screw it up.

Posted by: jeff | October 31, 2005 at 06:41 PM

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October 27, 2005

The FOMC In The Low-Inflation Era: Inflation Targeters or Price-Level Targeters

According to Victor Canto, writing in the National Review, the answer is price-level targeters.  Here's his claim, as picked up by pgl at Angry Bear:

While it’s true that the Fed has never disclosed its operating procedure, I have pointed out over the years that its policy behavior is consistent with the domestic price rule. What’s more, I have argued that the U.S. inflation rate was consistent with a price rule even prior to the Greenspan years.

OK then, lets go to the record.  Here is how inflation, measured by the PCE chain-weight index, has behaved since 1983:


The picture is pretty clear.  If you believe that the FOMC has had an implicit inflation target of about 2%, the data since about 1992 would give you no argument.  You have a little more trouble going back to the Volcker/early-Greenspan years.  Either you must assume that the implicit target was different in the earlier phase of the post-70s disinflation, or that the various incarnations of the FOMC in the 1980s were willing to accept a very long transition period to the preferred rate of inflation.

Which brings us to the key distinction between an inflation target and a price-level target.  A central bank operating under an inflation target will let bygones be bygones:  If inflation comes in above target is in any particular year, no conscious effort is made to undo the the effects on the level of prices by subsequently engineering inflation below the target.   

Without assuming that the implicit inflation target was varying over the period since 1983, the proposition that the FOMC acted as if they were price-level targeters is a pretty tough sell.  What about in the Greenspan years?  It obviously depends on when you think the implicit 2% target became operative.  If you contend that it was the objective since the beginning of Mr. Greenspan's tenure in August 1987, there is a very big distinction between the inflation targeting approach and the price-level targeting approach.  If you are willing to start the clock at the end of the 1990-91 recession, or the beginning of 1992 (to get some distance away from the trough of the cycle), the FOMC looks like pretty successful inflation targeters (again assuming that a 2% annual increase in the price level is the goal):


The actual average rate of PCE inflation over the period since 1992 has been just a tad over 2%.  As a simple matter of arithmetic, a price-level target that allows the price level to grow at 2% will look almost exactly like a successfully maintained average-inflation target of 2%.   Whether or not you see the inflation-target vs. level-target approaches as amounting to distinctions without a difference depends on when you think history began.

If you are interested, here are the Power Point source for the pictures above:

Download pce_slides.ppt

UPDATE: In a follow-up, pgl correctly notes that observing a particular price-level trend in a small sample of years is not proof of a price-targeting central bank.

October 27, 2005 in Federal Reserve and Monetary Policy, Inflation | Permalink


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Brad DeLong has more on why Canto has this all wrong.

Posted by: PGL | October 27, 2005 at 06:52 PM

thanks; i found this most helpful

Posted by: brad setser | October 28, 2005 at 12:30 AM

Given all the concern about deflation when inflation was at 1%, it is difficult to believe they are targeting levels. If you were, you would want inflation this low to counteract rates that were higher than 2%.

Posted by: cb | October 28, 2005 at 02:15 PM

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October 25, 2005

Consumer Blues

This chart, from the Conference Board's report on its October Consumer Confidence Index, tells the story:


See if this makes you feel any better:

“Much of the decline in confidence over the past two months can be attributed to the recent hurricanes, pump shock and a weakening labor market,” says Lynn Franco, Director of The Conference Board Consumer Research Center. “Consumers’ assessment of current conditions, however, remains above readings a year ago, but their short-term expectations are significantly below last October’s level. This degree of pessimism, in conjunction with the anticipation of much higher home heating bills this winter, may take some cheer out of the upcoming holiday season. In order to avoid a blue Christmas, retailers will need to lure shoppers with sales and discounts.”

Hmm.  Probably not.   Try this:  Existing home sales remained strong in September, and The Skeptical Spectator suggests "weekly chain store sales provided a more optimistic picture."

October 25, 2005 in Data Releases | Permalink


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I think the problem is political: how *do* you maintain a consumer based economy while the political party in power does everything it can to shaft and shackle people who work for a living?

Posted by: camille roy | October 26, 2005 at 02:50 PM

What a useful comment. Thanks for your insight, Camille.

Posted by: cb | October 26, 2005 at 04:10 PM

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FOMC Views On Inflation Targeting: Updating The Cleveland Box Score

In my previous post, I provided a summary of views on inflation targeting, compiled by Reuters from the public statements of various Federal Open Market Committee participants.  When it came to the thoughts of Federal Reserve Bank of Cleveland president Sandra Pianalto, the Reuters article relied on a speech delivered in Italy on February 21. I think they might have done better to have focused on this, from a speech President Pianalto gave in April:

As you know, the FOMC discussed the pros and cons of establishing an explicit numerical inflation objective at the February meeting.  I think that being more explicit about our inflation objective could help us to be successful in maintaining price stability, but my expectations are modest.  I do not regard an explicit numerical price objective as a panacea.

We might gain some additional credibility with the public by simply being clearer than we are today and, at the same time, greater clarity might impose some extra self-discipline when we really need it.  Let me make my own contribution to the cause.  My view is that the rate of inflation should average about 1½ percent, as measured by the Personal Consumption Expenditure price index, over periods of about three to five years. 

Inflation is certain to vary in the short run, even when we achieve the objective over time.  So putting a range around that long-run objective makes sense to me.  My personal tolerance zone is a 1 percentage point spread above and below my 1½ percent inflation objective.  I don't view this necessarily as a policy-triggering boundary, but when inflation falls outside that range, I would feel more obligated to explain why I regarded that situation as acceptable. 

These are my personal guideposts.  I generally support the idea of a Committee objective and range.  I say generally because I think it is not particularly useful to offer a blanket endorsement for a proposal that is not yet on the table.  Furthermore, I'm sure many of you have been keeping score and know that some of my colleagues are in favor of more formal numerical objectives, but others are not.  This does not trouble me, because I do not think it is necessary to jump to formal targeting in one leap.  However, I think it would be useful to take a step in that direction.

The FOMC's semi-annual economic projections provide a mechanism for taking that step.  As you know, twice a year the FOMC now provides the public with economic projections for the current year and the year ahead.  The step I have in mind would have the FOMC provide an additional three- to five-year projection for inflation. This would be based on the participants' working definitions of price stability and policies that support them.

The ranges and central tendencies of these extended projections would be made public, perhaps in an expanded discussion in the Monetary Policy Report.  I would not be surprised to discover that the extended three- to five-year inflation projections of the individual FOMC participants converge to a fairly narrow range.  This convergence could provide the foundation for a more formal inflation objective at some point in the future. 

Taking this step ought to be regarded as a logical extension of our current practice. In fact, I regard it as entirely consistent with the gradual approach the Committee has taken over the years to improve communications with the public.

I'll let you decide what camp that puts her in.

October 25, 2005 | Permalink


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FOMC Views On Inflation Targeting: Can't Know Your Players Without A Scorecard

Although I can't find the link, my morning news included this handy rundown from Reuters:

Reuters News, October 24, 2005

FACTBOX-Fed views on U.S. inflation targeting


Bernanke is a long-time advocate of inflation targeting and was viewed as the leading proponent when he was at the Fed. He has said a 1 percent to 2 percent increase in the core PCE price index would be an optimal U.S. inflation rate. In an October 2003 speech, he said the Fed could gain some of the benefits of targeting with the "incremental step" of announcing a numerical inflation objective with the understanding that it was a long-run goal for which the Fed had no fixed timetable.


Ferguson has said an inflation target could lead to a loss of policy-making flexibility and might lead officials to focus too heavily on inflation as opposed to full employment. He said an inflation target would not provide the United States with "any obvious incremental benefits" and said "performance, not predetermined frameworks" are what build inflation-fighting credibility.


Bies has expressed comfort with the current policy framework but has not commented recently on targeting specifically.


No public comments.


Kohn has been opposed to inflation targeting. In April, he said it was unclear if a target was needed in the United States, where the Fed's commitment to price stability was well-ingrained. He also said it would be important for the Fed to have political support for any move. In October 2003, he said the costs of a more-constrained policy approach would likely outweigh the benefits. "Those who propose changes from a good system have a high burden of proof," he said.


No public comments


No public comments


Santomero is an advocate of inflation targets. He has said the Fed should set a target band of a 1 percent to 3 percent increase in the core PCE price index, as measured by a 12-month moving average. Santomero has said a target "would not only better inform market participants of our intentions but would also strengthen their capacity to monitor our performance." In an Oct 17 speech, he reiterated his support for targeting.


In a Feb. 21 speech, Pianalto said price stability was the most important contribution a central bank could make to economic prosperity and said the Fed had been "fairly successful" without an inflation target. However, she did not specifically say whether she preferred the current framework.


Lacker has said an inflation target would improve the effectiveness of monetary policy by helping to anchor inflation expectations. In terms of the core PCE price index, he said he would like a target range of 1 percent to 2 percent.


No recent public comments. He told Reuters in February 2003 he was comfortable with how policy was being conducted. "I think we've achieved, or are achieving in the way we go about things, much of what a formal targeting regime would give you and yet have at least some latitude ... to deal with special circumstances as they come along," he said.


Moskow has said the Fed's working definition of price stability serves as "an implicit target" on inflation without restraining policy-making flexibility, and that the United States has achieved price stability without a rigid inflation target.

Targets could complicate the Fed's dual mandates of employment and growth, Moskow said in a speech on Sept 26. In the past Moskow has said that studies had shown "no evidence" targeting is helpful.


Poole is a long-time advocate of inflation targeting. He has said zero inflation, properly measured, would be the best objective but has also said would staunchly support whatever numerical target could be arrived at by consensus.


Inflation targeting "would build upon and formalize what we've learned from past success and failures," Stern said earlier this month. In a paper he co-authored late last year, Stern concluded Fed policy focused too heavily on short-term economic stabilization and not enough on long-term price stability. In the paper, he said targeting a range for inflation expectations or for a variable, such as a money supply measure, that could be shown to have a stable long-term relationship with inflation could improve policy.


No recent public comments. In 1998, he said he had "some sympathy" for an inflation targeting policy.


No public comments.


Yellen said on Sept 27 that she doubted that a more formal inflation target would be adopted by the United States but that articulating a numerical definition of what constitutes price stability would be possible.

Yellen has said that one percent to two percent on core personal consumption expenditures was her preferred range or "comfort zone" on inflation.

October 25, 2005 in Federal Reserve and Monetary Policy, Inflation | Permalink


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I thinks this report of big people was difinately researchable...

Posted by: Juno888 | June 19, 2007 at 09:38 PM

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Getting The Savings Glut Right

Perhaps it is because he is the most forceful discouraging word at the moment, but for the second day in a row I find myself reacting to a comment from Barry Ritholtz at The Big Picture.  What got my attention this morning relates to Barry's reservations about Ben Bernanke's nomination to replace Alan Greenspan at the helm of the Federal Reserve Board of Governors:

My only reservations with Bernanke are a couple of his speeches as a Fed Governor:

The Global Saving Glut and the U.S. Current Account Deficit -- was just so much political blather. It completely fails intellectually.

I have used the global savings glut story many times -- most recently here -- but I do agree with those that have urged us to put more emphasis on the global investment bust side of the story. Although a glut by definition implies a surplus relative to a deficit in something else, from which side of the saving-investment equation the surpluses arise is relevant for many of the policy questions we want answered.  But that quibble aside, I think Brad Setser has exactly the right perspective:

But Bernanke's savings glut speech also got two key things right -

The counterpart to the increase in the US current account deficit has been a rise in the current account surplus of the emerging world.    He rightly puts far more emphasis on the emerging world than on Europe or Japan...

And Bernanke recognizes that the transition from a housing-centric to an export-centric economy (when it happens) may not be easy.

An intellectual failure it was not.

October 25, 2005 in Trade , Trade Deficit | Permalink


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» More Glut from The Big Picture
Macroblogger David Altig got me thinking in more detail about the Bernanke/Clarida Savings Glut argument; As mentioned previously, I am not a fan of this flavor of rhetoric, nor the specific details. I find them wholly unpersuasive. Indeed, the entire... [Read More]

Tracked on Oct 26, 2005 1:09:14 PM

» More on the Savings Glut meme from The Big Picture
Macroblogger David Altig got me thinking in more detail about the Bernanke/Clarida Savings Glut argument; As mentioned previously, I am not a fan of this flavor of rhetoric, nor the specific details. I find them wholly unpersuasive. Indeed, the entire... [Read More]

Tracked on Oct 29, 2005 7:04:51 AM


I also think Brad got it about right with regard to the savings glut. He raises some important questions that are worth debating.

Posted by: William Polley | October 25, 2005 at 08:52 AM

The savings glut argument is a semantic game that reminds me of The Simpsons:

"Oh, meltdown. it's one of those annoying “buzzwords." We prefer to call it an unrequested fission surplus."

While that settles the issue for me, others may want more details:

1) The US savings rate is almost nonexistent; It is exceedingly difficult for a stone cold drunk to lecture others on the virtues of fine wine;

2) Much of the rest of the world looks somewhat askance at what is often called the "excessive consumption" in the U.S.

Consider Europe: Their culture is much longer vacation time than us, shorter working week, and most of the Summer off. They are not nearly the consumer society we are. For us to suggest that Europeans need to start buying more stuff is not only unrealistic, it generates guffaws.

3) In all seriousness, The Savings Glut argument is a defense of a structural imbalance via a mostly painless solution, rather than the difficult medicine (most adults) know are necessary to cure the problem.

4) Then there's the "careful what you wish for" factor: What would happen if the rest of the world suddenly decided to go on a spending spree, racking up big debts, rather than buying our bonds?

Sheesh, tis a scary thought . . .

Posted by: Barry Ritholtz | October 25, 2005 at 02:43 PM

While I tend to agree with Barry that the global savings glut thesis does not fit the facts, I never considered Bernanke's statement to be motivated by GOP politics. It is interesting to note that the Bush cheerleaders over at the National Review do not like this appointment either - but their "reasoning" is full of BS. But then - what's new?!

Posted by: pgl | October 25, 2005 at 04:45 PM

I reread Brad Setser's piece (Here: http://www.rgemonitor.com/blog/setser/105474).

Its hard to find in his critique any evidence that he buys into the Savings Glut meme . . . Indeed, after agreeing with Dan Gross critique that the Savings Glut
is a self-serving explanation for America's bad habits (see this: http://slate.msn.com/id/2121017/), Setser goes on to list 5 major criticisms of the Savings Glut theory.

The two nice things he said was little more than a polite coda, IMHO

Posted by: Barry Ritholtz | October 25, 2005 at 05:25 PM

Ben Bernanke is more than welcome to quote or attempt to dispute my conclusions as outlined below. I believe the following explanation is accurate and comprehensive.

Dave, your people at the Cleveland Fed are welcome to try to take it apart. I have plenty of CEOs and other heavies sitting on my side of the table.

Economic Hydrology Theory

The Future of Domestic Production versus Offshoring and Outsourcing to Foreign Locations

Once the WTO and national governments improved the opportunities for corporations to invest in the least expensive global production locations, the stage was set. Coupled with continually improving transportation and communications efficiencies, the successes of offshoring and outsourcing corporations which led the way were met by competitive desires of other corporations to also seek new lowest cost production sources. At present, over 450 of 500 top U.S. corporations have operations in China, as an example.

Unimpeded and with regard to available skill levels and technologies, corporations will seek out the lowest cost blue collar and white collar production sources on the planet and will create new production empires in those locations as fit their market needs. Currency manipulations and other foreign and domestic government incentives that improve foreign-based blue collar and white collar production opportunities increase the rate of flow or transference to such locations. The larger concentration of global production in lowest cost production environments results in a convergence of foreign direct investment (FDI) monies targeted toward achieving greater scales of production at these locations. This effort, in turn, minimizes the need for investment and development elsewhere by such corporations which further eliminates the logistical and technical support chains that previously existed for duplicate operations at facility locations in other nations. The results are reduced overall investment costs, reduced production costs, labor substitution, and reduction of related supporting logistical and technical support services and employment in other nations.


Good Luck, Ben.


Posted by: Movie Guy | October 26, 2005 at 03:05 AM

Well since Ben Bernanke himself is probably suffering from a bit too much overbooking to speak out in his own defence, I'll throw in my two centimes worth (from here in Euroland) to see if I can throw any light on why he holds to such an apparently 'intellectually flawed' hypothesis. (gee, for someone who's main strength has been argued to be his intellectual prowess, this would certainly seem to be a failing were it to hold).

First I think that what needs to be said is that Bernanke did not simply talk about a "global savings glut", he spoke about the 'glut' *and* the US CA deficit, and it was undoubtedly this association which lead to all the fuss.

It was thought that Bernanke was trying to *justify* the CA deficit. I would argue he wasn't trying to justify anything, he was trying to understand something. I wish more people would follow his example in this sense.

And what was he trying to understand? He was trying to understand something which apparently has even Alan Greenspan puzzled: why long term interest rates remain at stubbornly low levels.

Bernanke was trying to understand and explain this phenomen, and I think it is behoven on his critics , in rejecting his explanation, to offer - as surely they are entitled to do - some rival hypothesis.

Simply to say that monetary policy has been extremely accommodative is circular and begs the question: why has monetary policy been able to be extremely accommodative, indeed, as Dave would be the first to recognise, why are central bankers having great difficulty in easing them upwards without pushing against yield-curve inversion?

This was Bernanke's first problem.

Clearly it is the historically low level of long term rates which facilitate the US CA deficit, even if the mechanism is via a wealth effect on US consumers produced by a housing boom which is fuelled by these same rates.

By-the-by Bernake made what I think is the extraordinarily obvious point that there is no necessary connection between substantial and sustained fiscal deficits and CA balances, with high government deficiters Germany and Japan running ongoing surpluses. This I think is what brought the boiling oil down on Bernanke's sun-baked back.

Now what did Bernanke actually say about saving? Well......

"one well-understood source of the saving glut is the strong saving motive of rich countries with aging populations, which must make provision for an impending sharp increase in the number of retirees relative to the number of workers. With slowly growing or declining workforces, as well as high capital-labor ratios, many advanced economies outside the United States also face an apparent dearth of domestic investment opportunities. As a consequence of high desired saving and the low prospective returns to domestic investment, the mature industrial economies as a group seek to run current account surpluses and thus to lend abroad."

Here we have one key point: demographic changes in the ex-US Oecd world are producing ever-higher saving rates, *and* a weak-internal-demand driven dearth of investment opportunities.

Some have referred to Bernanke's linking of saving and investment here as subtle. Pah! I would say it was basic Econ 101, ineed I would say that anyone who doesn't have the basic intuition involved here shouldn't even bother signing up for Econ 101. Saving and investmnent are connected, normally via interest rates, and low interest rates normally should be seen as indicating something about the supply of savings and the demand for investment.

Bernake here is simply citing IMF orthodoxy about the impact of demographic changes on global trade and savings patterns (see WEO October 2004, Chap 2), and the result of a lot of simulation studies which all point in the same direction.

Where I think what Bernanke said might be criticised is for using "too broad a brush". This is also something which has allowed his critics in through the back door. What he declares to be a stylised fact of all mature industrial countries is far from such. It is not true, for example of France, it is not true of the UK. So the argument does obviously need refining.

I have been arguing that we need to consider two factors here: median ages, and the rate of ageing. The two countries with the highest median age, Germany and Japan (both over 42) are well-characterised by this account, as are countries which are ageing rapidly (S Korea, Hong Kong, Taiwan, Singapore).

China is a connundrum, and many factors are undoubtedly in play, but at least part of the explanation for China's high saving rate must surely be the very rapid increase in life expectancy and the fact that the economically more prosperous urban population have few descendants thanks to the one child policy.

Bernake's thesis, however, isn't limited to the developed world since:

"a possibly more important source of the rise in the global supply of saving is the recent metamorphosis of the developing world from a net user to a net supplier of funds to international capital markets".

So why the change? Well, for Bernanke:

"In my view, a key reason for the change in the current account positions of developing countries is the series of financial crises those countries experienced in the past decade or so"

This view has been criticised on the grounds that many of those who suffered most during the crisis have now carried out "balance sheet repair" and this argument surely has a ring of truth to it.

Again, I think the original view needs re-defining, just as the term "mature industrial economies" is far to broad, so too is the term "developing countries", since in this he includes states as diverse as S Korea and Thailand (which are, in fact, rapid agers) and the oil exporting states which still (ex Russia) are extraordinarily youthful in general (ie still have to pass through the full demographic transition). Interpreting saving in this latter - oil producing - context again isn't easy. One explanation could be 'income smoothing' (if you expect the price of oil to fall again) or another could be a 'lop-sided' development impact with the sudden surge in earnings skewing even further societies with high levels of inequality and corruption.

Be that as it may, the absence of theory doesn't decry the reality, which is the accumulation of savings, and lower global interest rates, which is why I think the 'savings glut' argument will prove to be more than something of a passing intellectual fad.

Incidentally Barry, since Brad S doesn't seem to have passed by, he is *not* a 'savings glut' argument groupie (which I must admit I unashamedly am). He simply recognises that *some* of Bernanke's arguments make sense.

Also, from over here in ol' Europe, we love leisure, but not the kind which means that participation rates from 55 onwards are ludicrously low, and Paygo pension funds in constant danger of un-balancing. Also, there is no 'typical' EU ageing profile. French fertility is not that different from that in the US, the UK is still comparatively 'young'. The big agers are Germany, Italy and Spain. The interesting thing will be to watch whether after the housing boom ends Spain will enter the group of glut-inducing savers.

Posted by: Edward Hugh | October 26, 2005 at 04:40 AM

ok, I am a bit late to this party, but:

1) I cannot match Edward on aging, but I do know a thing or two about emerging market balance sheets, and to me, the "balance sheet" repair argument is the weakest bit of Bernanke's argument. China simply never had a external balance sheet weaknesses that it needed to repair (its levels of external debt to reserves were always healthy, and it has very small currency mismatches), and, while it is not worth going into here, buidling up fx assets to me is of very little use when it comes to repairing the domestic balance sheets of the banks. shifting fx reserves to the banks as capital just transfers the central banks currency mismatch to the banking system, and to a large degree, it has substituted for more fundamental repair. bottom line, balance sheet repair cannot explain why china's reserves went from 30% of GDP to 50% of GDP over the past couple of years. And Russia also has by now more than repaired its balance sheet, and it truly did need some repairs back in 99 and even 00 -- I take balance sheet vulnerabilities seriously, but reserve accumulation in EM land accelerated AFTER the key balance sheets already had been repaired.

2) you will note that I don't criticize Argentina, Brazil or Turkey for reserve accumulation -- i think all three have balance sheets that are still under repair. Turkey in particular should have built up reserves (net reserves) by intervening to offset lira appreciation in my view.

3) I think Bernanke's initial speech did put too much emphasis on the savings side, and only later did he modify his presentation to include the fall in investment ... it works better on those terms. ironically, it also works pretty well right now, largely because of the late 04 deceleration in investment growth in china led savings v. investment to swing a bit, and, above all, cause of the oil exporters.

4) I would note that a global savings glut (relative) to investment triggered larger net private capital flows to China (do the math -- FDI + hot money was 10% of GDP or so in 04; maybe a bit less in 05) but none of the mechanisms that Bernanke indentified that turned a smaller surge in inflows to the uSA into lower savings and investment took root in China -- presumably b/c the chinese authorities resisted. lots of my critique of bernanke comes down to not emphasizing enough that the private flow of capital has shifted back to emerging markets.

5) both my critique and my points of agreement were sincere -- I cannot tell you how often I run across arguments that work off the premise that emerging markets need access to financing from the US in order to develop. Maybe. But right now, the US needs financing from emerging markets even more ... Dooley et al also got the basic flow of funds right. lots of folks don't. this is one of my biggest pet peeves.

6) finally, edward, i would note that according to the IMF, investment in the euroland as a whole is about the same as investment in the us as a share of GDP, and if you net out residential investment, it might well be higher -- the big difference is not "attractive investment in us, but not in europe" so much as that, setting spaniards aside, europeans save and we here don't.

Posted by: brad setser | October 27, 2005 at 01:15 AM

p.s. i also don't like the 20 cents on the dollar fed study for the impact of fiscal adjustment on the current account quite as much as bernanke does ... but my critique of that study (which assumes lots of crowding out) is a bit at odds with my crique of the glut -- edward is right, the core mystery is why us real long-term rates are as low as they are despite the big swing in fiscal toward a structural deficit. Bernanke was on to something, even if i don't buy his balance sheet repair explanation ...

Posted by: brad setser | October 27, 2005 at 01:19 AM

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October 24, 2005

The Measured Pace Train Slows A Bit?

I regularly receive email commentary from Fimat USA's Stan Jonas, the Obi-Wan-Kenobi of options on federal funds futures.  Today, Stan had this to say:


Our usual Carlson-Craig-Melick estimates of the federal funds probabilities did show some softening in the sentiment for an uninterrupted trek toward 4-1/2 percent by the end of January.  November still looks like a lock for another 25 basis points...


... and expectations are holding steady for another hike in December:


But, perhaps due to last week's moderation in oil and gas prices, some second thoughts began to emerge about January:


The data, for you to ponder:

Download implied_pdf_november_102105.xls

Download implied_pdf_december_102105.xls

Download implied_pdf_january_102105.xls

Download Imp_pdf_slides_for_blog_102105.ppt

UPDATE: The Capital Spectator says

A day after Ben Bernanke was named successor to Alan Greenspan, traders of Fed fund futures reminded the Fed chairman-nominee that interest rates should keep rising well into next year... the price of the the April 2006 contract dropped today in anticipation of Fed funds rising to around 4.5% by next spring.


October 24, 2005 in Fed Funds Futures | Permalink


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But isn't skipping January a bit of a delicate matter with the changeover. Mightn't this send the wrong signals. My guess is that if they're going to skip it will be December, could even be November, depending on the data that comes in between now and then, particularly on housing and movements in oil prices. The important thing was post Katrina, to signal no backing down.

Bernanke is intelligent enough to know that he will also need to keep a weather eye on what is happening in Japan and Germany. If the Japanese 'recovery' proves not to be as durable as many anticipate and fiscal tightening in Germany tilts the economy back towards zero growth (and no rate rises at the ECB) then I wouldn't be at all surprised to see a pause in November and another one in February. A measured pace implies that at some stage you move over to a drip feed, not that you keep going until you are about to burst and then operate a hand-brake driven U turn.

Posted by: Edward Hugh | October 25, 2005 at 02:10 AM

Reading the press today (Wednesday) and the way the debate is firming up on whether Bernanke is a dove or not I think I would even firm up my original position. I think we will see one pause before Greenspan goes. The easiest way to do this would be November. To kill the dove 'hint of a doubt' Bernanke is going to have to lean on the tightening side, Greenspan is enough of an old goat to realise this and factor it in. Also if he pauses, then any slackening of the 'measured pace' later won't be seen as a change of policy. I think we neeed to consider the 'transitional dynamics' of handover here,

This is in Reuters this morning:

"Many in financial markets still believe the likely next
Federal Reserve Chairman, Ben Bernanke, is an inflation dove, but economists say he is unlikely to prove soft on inflation."

"Economists generally have not changed their interest rate forecasts for the first few months of 2006, even after Bernanke was nominated on Monday to replace Fed Chairman Alan Greenspan when he retires after 18 years at the end of January."

"Top Wall Street economists expect the benchmark federal funds rate, now at 3.75 percent, will peak somewhere between 4.0 and 5.0 percent regardless of the handover from Greenspan to Bernanke, a former Fed governor himself."

""Markets are looking for Bernanke to prove his central banker credentials and that's usually an issue of being willing to tighten policy, if there's any room for discretion," said Goldman Sachs senior economist Ed McKelvey."

"As a central banker, if there were any particular tendency it would be in the direction of continuing the tightening process," he said."

Posted by: Edward Hugh | October 26, 2005 at 02:41 AM

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More On Core

Barry Ritholtz is assigning Dan Gross to Jonestown, but Dan's New York Times article on why monetary policymakers focus on core inflation includes this bit that, in my opinion, hits the nail on the head:

... the Fed tends to focus on things that it can control. Not even a Fed chairman as powerful as Alan Greenspan can affect the price of oil by manipulating interest rates. "There's nothing the central bank can do about that, unless it figures out how to produce more oil," said Michael F. Bryan, vice president and economist at the Federal Reserve Bank of Cleveland.

But the Fed can control the amount of money circulating in the economy relative to the quantity of goods available. "So it tries to find the inflation signal common to all prices throughout the economy," Mr. Bryan said.

Thus considered, the core C.P.I. may be the best tool the Fed has to monitor long-term changes in prices.

Okay, as long as I am waving the hometown colors, this comes from the person at the Cleveland Fed who actually makes the decisions:

Let me spend just a moment explaining how I look at inflation. As a policymaker, I pay attention to the "core" measures of consumer price inflation as well as the overall "headline" measure of consumer price inflation, because the headline number can be somewhat misleading...

... the idea is to strip away the "noise" of volatile price changes, so that we can see the underlying inflation trend more clearly.

Of course, the FOMC's mandate is to control overall inflation:  the average of all prices, including food and energy, as well as all the other things you buy. But we have found that measures of core inflation tend to be better predictors of future inflation than the headline rate, giving us a better picture of the true inflation trend.

I added the emphasis. Of course, Barry won't buy it -- and I mean really won't buy it-- but I think Mark Thoma did a pretty good job a few days back at laying out some casual evidence  behind President Pianalto's assertion that core gives "us a better picture of the true inflation trend."  I particularly liked this picture from Mark's post:


The fact that the difference between actual inflation and core inflation does not permanently drift away from zero is exactly the point:  There is a lot of noise in the short-run, but over time core measures really do give you a sense of where things are eventually heading.   (I am  asserting here, of course, that it is mainly actual inflation that "catches up" with the core measure, not vice versa.)

New Economist left an interesting  comment to Mark's post suggesting that, even though total and core rates of inflation do not diverge over time, the same cannot be said of their corresponding levels.  Right:


This gets to the question of whether the central bank should have an inflation target or a price-level target.  Some have argued that the latter may be preferable, at least in some circumstances -- here and here, for example.   Others say inflation targeting is the better choiceSome say none of the above.  Maybe this is all about to get more interesting.

October 24, 2005 in Federal Reserve and Monetary Policy, Inflation | Permalink


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I've been meaning to write about stabilizing inflation versus stabilizing the price level ever since Carolyn Baum's column the other day on price stability (or her claim of lack thereof), so thanks for opening the door on this topic. I think it's worth discussing further.

Posted by: Mark Thoma | October 24, 2005 at 08:53 PM

I am saying that Dan is hip to the inflation ex-inflation crowd -- he gets it . . .

Posted by: Barry Ritholtz | October 24, 2005 at 10:17 PM

Mark -- the time certainly seems right.

Barry -- Maybe I should have said you were assigning Dan to the Jonestown beat.

Posted by: Dave Altig | October 24, 2005 at 10:47 PM

Fed cannot control oil prices - agreed. But it is an influence. Jeffrey Frankel has done work on this - suggesting real interest rates are a factor. And it is surely not controversial that the commodity price increases in the 1970s were in part a result of excessive Fed money creation.

Posted by: PEmberton | October 25, 2005 at 12:46 AM

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