Boston Fed President Eric Rosengren participates in a “Fireside Chat” on the economy, "Public Service That Makes a Difference®".
5 Takeaways from Rosengren’s June 23, 2021, Remarks
- Takeaway: Vaccination rates have been better than expected in much of the U.S., and that’s led to a more rapid reopening of the economy than was forecast earlier this year.
Excerpt: “I think the most important message is that we really have a quite a robust recovery that is underway. The economy is opening up faster than we would have anticipated five or six months ago. Vaccination rates particularly in New England but throughout the country have occurred more rapidly than we anticipated. And as a result, businesses are reopening much more quickly.”
- Takeaway: Forecasts of gross domestic product (GDP) have been significantly upgraded since the start of this year, with the median forecast of Federal Open Market Committee members at 7% growth for 2021. That is unusually high for a U.S. recovery.
Excerpt: “Seven percent is … more like a number that you would expect from an emerging market, not a developed country like the United States, and really highlights how strong the economic growth is expected to be over the course of this year.”
- Takeaway: Despite the positive signs, we still have quite a way to go before we reach full employment, given the most recent unemployment rate was 5.8%, substantially above the 4.5% FOMC participants project by the end of 2021. One reason for that is a slower recovery in public-facing services, including tourism, hospitality, restaurants, and retail.
Excerpt: “If you're working in a store, if you’re working a hotel, you're probably having a lot of contact with people, some of whom will be vaccinated, some of them will not, and you may just not be willing to take that much of a risk for a job that's not paying much more than minimum wage.”
- Takeaway: Inflation is higher, but spikes in food and energy prices explain much of this, and those will moderate. Increased inflation can also be attributed to a variety of things that have happened over the last six months because of the unusual facets of coming out of a pandemic – including shortages in a variety of goods and services that we don’t normally experience during a recovery.
Excerpt: “Most Fed speakers have talked about expecting inflation to come back to 2%. That is my forecast as well, that I expect us to be slightly above 2%. … So, I think the Fed’s expectation, that most of the price movement that's occurring this year is not sustained into next year, is actually a pretty common forecast.”
- Takeaway: Low rates and a high degree of stimulus have been appropriate, but it is important over time to watch for conditions that potentially raise financial stability issues.
Excerpt: “Housing prices [are] something worth closely monitoring. If we continue to see housing appreciation like we've been seeing, I think over time we'd have to take a hard look to see whether we're getting some spillovers from some of the monetary policy accommodation that we're having and think about ways to mitigate that.”
Mean Trimmed PCE
Inquiring minds may be wondering about Mean Trimmed PCE.
Research over the past decade has led to improved measures of core inflation in the Consumer Price Index, or CPI.
In a study focusing on the CPI and the PPI, Michael Bryan, Stephen Cecchetti and Rodney Wiggins make a statistical case for the use of trimmed means as a method for estimating core inflation.
Calculating the trimmed mean PCE inflation rate for a given month involves looking at the price changes for each of the individual components of personal consumption expenditures. The individual price changes are sorted in ascending order, and a certain fraction of the most extreme observations in both tails of the distribution are thrown out, or “trimmed”. The trimmed mean inflation rate is then calculated as a weighted average of the remaining components.
Mean Trimmed Winners and Losers (2005 Example)
That example, courtesy of the Dallas Fed, is from 2005, not now. Nonetheless, it provides a great handle on what the Fed is doing.
- The Fed takes the highest and lowest items in the PCE (not the CPI), and throws them out the window.
- It takes a weighted average of the rest.
- Housing prices are not in the PCE or the CPI, But even if they were, the mean trimmed approach would toss those out the window too.
- Via the magic of the above calculation, the mean trimmed PCE never varies far from the Fed's 2.0% target.
Nonetheless, Rosengren is worried about housing. This is worth repeating:
“Housing prices [are] something worth closely monitoring. If we continue to see housing appreciation like we've been seeing, I think over time we'd have to take a hard look to see whether we're getting some spillovers from some of the monetary policy accommodation that we're having and think about ways to mitigate that.”
Too Damn Late
This worry, like all Fed worries is too damn late. And not by a little either, as the following chart shows.
Mean trimmed adjustments are nonsense upon nonsense.
Real Interest Rates
Properly adjusted for housing, which neither the CPI nor PCE includes, real interest rates are approaching -7%. If you prefer -5% as measured by the CPI.
Meanwhile mean trimmed nonsense says inflation is well under 2.0%.
Question and Answer of the Day
Q: How do you get 7% "Real" Growth?
A: Since "Real" means inflation adjusted, the answer is by purposely underestimating inflation.
How Powell Thinks
Mercy! Better step on the gas as we demand inflation of 2% over time and the Mean Trimmed PCE is clearly not up to snuff.
Where We Really Are
I discussed a more realistic measure of inflation this morning in Real Interest Rates Are More Negative Now Than In the 2004-2007 Housing Boom
Please take a look.
Fueled by negative real interest rates, the Fed has blown another housing bubble. Late as always, only now are some of the Fed presidents have noticed.
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