EconVue Weekly Spotlight

All eyes are on Jackson Hole and the annual Kansas City Fed Economic Symposium. BOJ Governor Kuroda’s appearance on a panel on Saturday could be just as interesting as Fed Chair Yellen’s speech on Friday morning. Global central bankers who have made long flights and several connections in order to get to Jackson Hole are bound to be discussing the US election outlook with as much fervor as monetary theory. Some will wonder if Janet Yellen will attend next year.

The just-released line-up of speakers and papers at the symposium is here. From my experience attending the conference, the papers are not as exciting for media as the Chairman’s speech, but this is a place and a meeting where theory really matters. The most memorable symposium for me was in 2007, on housing, housing finance, and monetary policy, a prescient choice at the time. Marty Feldstein’s concluding remarks are here  

Most have expected Chair Yellen to signal an increase in the fed funds rate.  Another probable theme is that since monetary policy has given everything it has, now is the time for an increase in fiscal spending,  on infrastructure and other needs, while the cost of borrowing is so low. A more revolutionary view is that we should abandon the 2% inflation target that seems irrelevant or unattainable in a world of negative interest rates.  

Included below are a number of current papers published by central banks (some of them working papers) that might give an inkling of policy changes to come.

STORIES IN OUR SPOTLIGHT

SETTING THE STAGE FOR JACKSON HOLE

1.   The Dirty Little Secret of Central Banking 
Sebastian Mallaby 8/23/16 Washington Post

As central bankers gather this weekend at Jackson Hole, they will be laying to rest the 2% inflation target and will urge fiscal stimulus. Sebastian Mallaby:
It would underscore how the internationally celebrated 2 percent target is no divinely ordained rule; it is shockingly arbitrary. The magical 2 percent marker could just as well be 3 percent or 4 percent, and the dirty little secret of central banking is that the gains from stable prices are difficult to demonstrate. Despite the brilliance of its practitioners, monetary policy is not a settled science. It is an improvised experiment.

2. In the lead up to Jackson Hole
Twitter @SoberLook  8/21/16

The Fed is close to reaching its inflation and employment goals and the dollar strengthens in advance of rate hike discussion.  But currencies can also strengthen as interest rates fall-witness Japan.

3.  Stephen Jen: Fed watching has been the single biggest waste of my time in the past two years  
Roger Blitz, Sam Fleming 8/19/16 FT

...but things could get interesting now. Fed watchers rejoice.

4.  Why the Fed should Shrink its Massive Bond Portfolio
Andrea Riquier 8/19/16 MarketWatch 

The Fed should engage in a form of “negative quantitative easing” and allow some of the debt it currently holds on its $4.5 trillion balance sheet to run off when it matures, Eisenbeis and Berson believe. 

This relates to news from Japan (see #9 below) that the BOJ is holding back on ETF purchases.  Will negative quantitative easing become the new path for central banks, and if so and what does that mean for markets? Will it protect against a sudden unwinding of central bank assets?

DEEP DIVE: Bayesian Probability

I imagine that  Christopher Sims , the luncheon speaker on Friday, will be touching on these issues:

5.   Financial Stability and Optimal Interest Rates 

Andrea Ajello, Thomas Laubach, David Lopez-Salido, and Taisuke Nakata

August 2016 Fed Reserve Board  

Bayesian vs Robust policymaking choices. 

… the Bayesian policymaker responds to the negative demand shock by reducing the policy rate by less under uncertainty. In our calibration, the optimal policy rate becomes positive. Uncertainty regarding the severity of the crisis affects the robust policymaker facing a large negative demand shock in the same way as in normal times.

6.  Recession Forecasting Using Bayesian Classification

Troy Davig Aaron Smalter Hall August 2016 Fed Reserve Bank Kansas City

We demonstrate the use of a Naive Bayes model as a recession forecasting tool… In contrast to Markov-switching models, Naive Bayes treats National Bureau of Economic Research business cycle turning points as data rather than hidden states to be inferred by the model. ..We show Naive Bayes consistently outperforms logistic regression and the Survey of Professional Fore-casters for real-time recession forecasting up to 12 months in advance.  

TRADE

7.  Trade Liberalization and Mortality 
Justin R. Pierce, Peter K. Schott May 2016 Yale 

The Trump campaign would love to get their hands on this paper.  It documents and quantifies the decline in health, not just economic status, of communities that lost manufacturing jobs to China.  

8.  Global Uncertainty and U.S. Exports

Nicholas Sly Q2 2016 Fed Reserve Bank Kansas City

Businesses can deal with low or weak growth, what inhibits them is uncertainty.

Exports of goods and services account for a substantial share of total U.S. economic activity, with a total value upward of 13 percent of GDP since the year 2000…Sluggish export activity has been a drag on US growth recently…The propensity for uncertainty to diminish orders of U.S. goods suggest that export activity would likely pick up if foreign growth expectations were to stabilize, even if the expectations for growth remain relatively weak.

JAPAN

9. BOJ moving cautiously with ETF buying to preserve firepower
Makoto Nakanishi 8/25/16 Nikkei Asian Review

This is good news. And might just bring us closer to helicopter money. 

10. Will the Tokyo Olympics Be A Boost to the Japanese Economy?
Mitsuhiro Osada, Mayumi Ojima,Yoshiyuki Kurachi, Ko Miura, Takuji Kawamoto
1/21/16 Bank of Japan Research

The Bank of Japan says yes, predicting about $250B in benefits.

ECONVUE RESEARCH AND INSIGHTS

Banks, FSA Push Back Against Negative Rates
Richard Katz 08/22/16 

As long as Kuroda remains Governor, through March 31, the BOJ is likely to stick to his insistence that his policy is successfully moving Japan toward 2% inflation. This will further cement growing views that the BOJ policy is not data-driven but ideology-driven.

So while Bernanke tells us to watch the data, not FOMC members, EconVue expert Rick Katz is saying that the BOJ is driven by ideology and  dismisses the data. His new report on the effects of Japanese monetary policy is a must read, usually only available to subscribers, so please click through.

How P2P Lending Works 
Collin Canright 08/22/16

FinTech investment in blockchain firms continues to increase even as the sector as a whole contracts slightly.

The Decline of Putin’s Russia: My comments  
Nikolai Tagarov 08/23/16

We are reminded of Putin's predicament and the fact that his domestic support is not unassailable. This piece resulted in a lively exchange on our Facebook page.

ECONVUE CALENDAR AND EVENTS

September 26, 2016 One-Day “Director Boot Camp” Program in Chicago with Nicholas Benes

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