The legendary Bill Gross – formerly of PIMCO and these days Janus Capital – does not believe in a hike from the Federal Reserve this year. This is what he has to say about the issue according to a Tweet from Janus Capital:
Fed really tracks Nominal GDP, which since 2012 and last 12 mos avg 3.6%. Unless it moves higher fugetabout a hike. 4th Qtr? 3.0.
I of course to a very large extent agree. In fact I have long been making exactly the argument that the Fed since the second half of 2009 effectively has been targeting 4% NGDP growth.
The first time I argued that was in the blog post The Fed’s un-announced 4% NGDP target was introduced already in July 2009 back in September last year.
I would course love the Fed to in fact target 4% NGDP growth (level targeting), but I am afraid that the Fed has been moving away from this un-announced target in recent months since Janet Yellen took over as Fed chair.
Hence, back in August in my blog post Yellen should re-read Friedman’s “The Role of Monetary Policy” and lay the Phillips curve to rest I argued that Yellen’s had caused the Fed (or rather the FOMC) to shift focus from monetary/nominal factors and towards the labour market and more specifically towards a focus on a rather old-school style Phillips curve.
Yellen’s argument essentially is that inflation is not a monetary phenomena, but rather a result of lower unemployment, which causes wage growth to accelerate, which in turn push up inflation. This is what presently – due the the “low” level of unemployment – seems to be the driving force behind Yellen’s hawkishness.
As a consequence, I am not sure that Bill Gross is right. I would love him to be right, but I am afraid that Bernanke’s de facto 4% NGDP target might not be as rock solid anymore.
Another factor that is pushing the Fed in a more-than-good hawkish direction seems to be the influence of Fed vice-chair Stanley Fischer who has the responsibility for “macroprudential” analysis at the Fed. With a focus on macropru Fischer seems to increasingly thinking the Fed should worry about bubbles and imbalances in the US economy (I by the way see no signs of bubbles – see here what I wrote back in June on the issue.)
Any monetarist would of course be deeply skeptical about the Fed’s ability to spot bubbles and even more skeptical about its ability to do anything about them. However, Fischer does not share that view and it seems to me that he is causing the Fed to become overly worried about these issues.
I am not in the business of making forecasts on this blog, but I can only say that I am less certain about the Fed’s policy rule today than I was a year ago.
A year ago I would without hesitation have said that the Fed of course was targeting 4% NGDP growth and since NGDP expectations (according to prediction markets such as Hypermind) presently are falling somewhat short of this “target” there would be no reason to believe the Fed would hike. However, with Yellen’s Phillips curve focus and Fischer’s macroprudential focus I am beginning to worry that we might be getting “off track” from the 4% NGDP.
I certainly hope I am wrong and I would very much hope that the Fed would clearly articulate that it was targeting 4% NGDP growth for the medium-term and that it will set monetary parametres to hit this target.
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