President Biden denies there is an inflation problem

The inflation issue is one that has been heating up on 2021. One way of looking at it is to simply note the rising numbers we see be it for consumer or producer inflation. To that we need to add house prices because they are usually omitted from consumer inflation measures. There is an issue with annual comparisons due to the pandemic but the monthly rises have reinforced the theme. Next we can look at it via the official response and also by who makes it. One effort has come from the US Federal Reserve and here is Mary Daly of the San Francisco Fed from the 17th of February.

Fed’s Daly: – “Too-high inflation” not a risk to think about at the moment

– Don’t see “unwanted inflation” around the corner

– Pressures on inflation are downward.

She has been proven to be spectacularly wrong on her third point and wrong on her third. Unless she wanted CPI inflation over 5% she was wrong on that too. Whereas in reality there were clear risks.

The problem for Mary Daly is that having expanded the Federal Reserve balance sheet to US $7.44 trillion there were always going to be consequences.

Another step was the deployment of Treasury Secretary Yellen and he she is from February 8th.

Addressing Summers’ fears that the package would cause inflation, Yellen conceded that it was “a risk that we have to consider”. But Yellen, who as former Fed chair oversaw US monetary policy, added: “I’ve spent many years studying inflation and worrying about inflation. And I can tell you we have the tools to deal with that risk if it materialises.”

So far no such tools have materialised and the Federal Reserve has done nothing apart from claim that the inflation it denied would happen will be short-lived. It has changed its view of transitory though which has gone from 2-3 months to 6-9.

President Biden

The President joined the debate on Monday.

President Joe Biden addressed voters who are worried about inflation on Monday, arguing that his domestic spending plans would help keep prices low over the next decade. ( CNBC)

You may note the shift from now to an unspecified future. Also it was pretty extraordinary stuff.

“My ‘Build Back Better’ plan will be a force for achieving lower prices for Americans looking ahead,” Biden said in a speech Monday at the White House.

Biden argued the infrastructure and family support investments contained in his $4.5 trillion domestic spending plan will fund decades of economic growth, increase the workforce and keep prices low.

“If your primary concern right now is inflation, you should be even more enthusiastic about this plan,” said the president.

These are classic political moves as he again makes claims about the future and implies they will deal with inflation now. His Treasury Secretary is mining a similar vein.

“We will have several more months of rapid inflation, so I’m not saying that this is a one-month phenomenon,” Treasury Secretary Janet Yellen told CNBC in an interview that aired Thursday.

“But I think over the medium-term, we’ll see inflation decline back toward normal levels,” she added.

If we switch to the Washington Post we see two other tactics in play.

Speaking at the White House on Monday, the president said “no serious economist” believes “unchecked inflation” is likely. He blamed the rising cost of living on the strains of economic reopening.

“You can’t flip the global economic light back on and not expect this to happen,” Biden said.

As I have already pointed out the Federal Reserve did not expect this to happen and throwing insults such as “no serious economist” only reveals the pressure they are feeling.

The Problem

Part of it was highlighted in the Washington Post.

Only once in six years had Mark Maguire raised prices at his North Dallas restaurant.

Then, some of his employees, no doubt noticing the banners touting $1,000 signing bonuses at other eateries, demanded higher wages. And his suppliers hiked the cost of chicken, beef and cooking oil.

Maguire’s costs rose so much so fast that he has had to rewrite his menu prices twice since March. Whether additional increases will follow depends upon a complex interaction of food supplies, labor availability and a shape-shifting virus.

Although there is for those who prefer theory over practice the analysis of Mark Zandi of Moodys which has been quoted by President Biden.

Worries that the plan will ignite undesirably high inflation and an overheating economy are overdone.

In a way that is true because you cannot ignite something which is already burning. Then we get his demand pull style theory.

The fiscal support it provides is only sufficient to push the economy back to full employment from the recession caused by the COVID-19 pandemic.

Yet only a sentence later the he seems to be not so sure.

Because the package includes a myriad of spending and tax initiatives, some of which are new and uncertain,

Renewable Energy

This is an associated problem for the inflation debate. President Biden plans a big increase in renewable energy but the UK which has already invested heavily in this is today highlighting what always was the obvious flaw.

GB Grid: #Wind is generating 0.11GW (0.33%) out of 33.61GW

So much for the UK being the “Saudi Arabia of wind power” as Prime Minister Johnson has claimed. Also something which we were supposed to be consigning to the past is seeing a surge.

COAL MARKET: Asian benchmark coal (Newcastle 6,000kc/kg) spikes to a fresh 13-year high of $163 per tonne. For a commodity that was left for dead, Australian (and other) coal miners are making this year an absolute killing ( Javier Bias Bloomberg )

We keep being promised electricity will get cheaper and yet the same source reports.

Spanish wholesale electricity prices have now surged to a record high of €106.57 per MWh, surpassing the previous peak set in 2002. Power prices are turning into a hot political potato in some European countries this summer.

Curious because we kept being told Spain’s solar power was booming and the price dropping. One factor I have spotted from the UK data is that solar takes time to build within the day. For example at 10 am UK production was 3.5 gigawatts out of a maximum of about 8. So even on a hot July day it takes its time.

Thus unlike Moodys I am expecting longer-term inflation from this source. Hopefully there will be advances but with the plan to switch to electric vehicles we look to be creating a problem.


We have learnt over time that an official denial is tantamount to a confession. But as we survey the scene I see much that is familiar. One example of this is from Dylan Patel os semi-analysis.

Semiconductor shortage alone is causing nearly 2% of inflation! People often say inflation is going nuts, but most of CPI inflation is due to used car prices, vacation travel boom, and energy prices. Once you remove these, inflation is manageable.

We always see claims that there is little inflation via excluding the things which are going up! I note his chart uses only the lower core CPI. But if you are going to take things out surely you should put in things which are omitted like house prices. I am sure you have already figured why he has not done that.

Some elements will change and fade but others will emerge. For example whilst Imputed Rents are a fantasy  they will presumably pick up in response to higher hour prices. They will remain a poor guide but at 24% of the index even a small move will have an impact.

Returning to President Biden the idea that US $4 trillion of spending will not create inflation is an extraordinary effort. But in one area I do have sympathy because much of what is happening now relates to the decisions made before his term.





Bank of England QE is coming under increasing fire as inflation rises

This has been a bad week for central bankers as we have seen inflation soar above their predictions. The 5.4% for US CPI is not what the Federal Reserve explicitly targets but suggests a trend well above its thinking and that is before we get to the issue of the “transitory” or it you prefer “temporary” claims they have made. If you look at the statement to Congress of Chair Powell this week he shifted to expectations on inflation in response to this.

To avoid sustained periods of unusually low or high inflation, the Federal Open MarketCommittee’s (FOMC) monetary policy framework seeks longer-term inflation expectations thatare well anchored at 2 percent, the Committee’s longer-run inflation objective.

After all he can claim pretty much what he wants via them as opposed to workers and consumers paying higher prices who have no such choice. Also we had the UK with the targeted inflation measure going to 2.5% so 0.5% over and RPI at 3.9%. That is really rather awkward in a week where you have bought some £3.45 billion of UK bonds as part of a policy ( QE) to raise inflation.

House of Lords

They have published a report today which questions QE on a strategic level. One issue is how much of it is planned.

Since March 2020, the Bank of England has doubled the size of the quantitative easing programme. Between March and November 2020, the Bank of England announced it would buy £450 billion of Government bonds and £10 billion in non-financial investment-grade corporate bonds. In total, by the end of 2021, the Bank will own £875 billion of Government bonds and £20 billion in corporate bonds. This is equivalent to around 40% of UK GDP.

Those who have followed my “More! More! More!” theme which has been running for a decade will have a wry smile at this.

Therefore, the scale and persistence of the quantitative easing programme are substantially larger than the Bank envisaged in 2009.

It has also become the policy of first resort.

Once considered unconventional, more than a decade after its introduction, quantitative easing is now the Bank of England’s main tool for responding to a range of economic

Yet have things got better?

These problems are quite different from those of 2009.

The House of Lords does not explicitly say it at this point but let me point out that it has created problems along the way as the Cranberries told us.

In your head, in your head
Zombie, zombie, zombie-ie-ie


Their Lordships have spotted the 2021 issue.

Despite a growing economy and expansionary monetary and fiscal policy, central banks in advanced economies appear to see the risks of inflation in terms of a transitory, rather than a more long-lasting, problem.

A fair point as after all whilst the flow may stop ( presently planned to be towards the end of 2021) the stock of £895 billion including corporate bonds will remain on the books. After all, so far, the Bank of England has not redeemed a single penny. So in monetary terms there will remain an extra £895 billion in the money supply although care is needed because what follows from it is not as simple as what was thought. especially by the Bank of England itself.

Quantitative easing’s precise effect on inflation is unclear.

It has been made less clear in my view by the establishment effort to remove ways measuring this by downgrading the RPI which is a pretty transparent effort to move the focus away from the house prices it includes. Can anybody think why?

Since they finalised their thinking the statement below has been reinforced by inflation going over its target as well.

The official inflation rate is already higher than
the Bank of England’s previous forecasts.

These factors add to the challenges here.

The Bank of England forecasts that any rise in inflation will be “transitory”; others disagree.

They then pose a challenge whilst also issuing a critique. After all it should have made its thinking clear.

We call upon the Bank of England to set out in more detail why it believes higher inflation will be a short-term phenomenon, and why continuing with asset purchases is the right course of action.

This leads to the crux of the matter because as I have frequently pointed out monetary policy takes around 18 months to 2 years to have its full impact. That may even have lengthened in the modern era due to the increased numbers of fixed-rate mortgages which is considered a major transmission mechanism. Yet we have central bankers who ignore that and at times claim that they can act during or even after the event which to mt mind requires the ability to time-travel.

The Bank should clarify what it means by “transitory” inflation, share its analyses, and demonstrate that it has a plan to keep inflation in check.


Their Lordships seem to have stumbled on my point that we will not see many if any interest-rate increases because of the cost of them.

Quantitative easing hastens the increase in the cost of Government debt because interest on Government bonds purchased under quantitative easing is paid at Bank Rate, which could be much higher than it is now (0.1%) if the Bank of England had to increase Bank Rate to control inflation. As a result, we are concerned that if inflation continues to rise, the Bank may come under political
pressure not to take the necessary action to maintain price stability.

That is of course assuming they do not follow the path trod by the ECB and simply change the rules of the game.

These included an option to not pay interest on commercial bank reserves.

This bit made me laugh and I hope it is humour.

While the UK can be proud of the economic credibility of the Bank of England, this credibility rests on the strength of the Bank’s reputation for operational independence from political decision-making in the pursuit of price stability.
This reputation is fragile, and it will be difficult to regain if lost.

Like so many central banks they lost it years ago.

Michael Saunders

We can now switch to the tactical rather than the strategic and yesterday one of the policy-makers said this.

In my view, if activity and inflation indicators remain in line with recent trends and downside risks to growth and inflation do not rise significantly (and these conditions are important), then it may become appropriate fairly soon to withdraw some of the current monetary stimulus in order to return inflation to the 2% target on a sustained basis. In this case, options might include curtailing the current asset purchase program – ending it in the next month or two and before the full £150bn has been purchased – and/or further monetary policy action next year.

So there may be several votes for ending the QE programme early. Not enough to win a vote but increasing.

Oh and his confession that they had for their forecasts wrong (most of you are no doubt thinking again) is rather devastating for their “transitory” claims.


If we switch to the benefits we seem to get ever more of something that has unclear results.

We found that the available evidence shows that quantitative easing has had a limited impact on
growth and aggregate demand over the last decade.

They do not point out the moral hazard of the evidence often coming from those operating the policy. There are also losses and problems.

Furthermore, the policy has also had the effect of inflating asset prices artificially, and this has benefited those who own them disproportionately, exacerbating
wealth inequalities.

I am glad they are making this point as I believe they did note my points about house price rises when I gave evidence to the RPI enquiry. Actually even the Financial Times may be forced into a rethink as it is its economics editor Chris Giles who led the charge to remove house prices from the RPI.

Finally it is hard not to have a wry smile at Lord King of Lothbury criticising a policy he started.

“I wonder if I’ve been changed in the night. Let me think. Was I the same when I got up this morning? I almost think I can remember feeling a little different. But if I’m not the same, the next question is ‘Who in the world am I?’ Ah, that’s the great puzzle!” ( Alice In Wonderland )

Inflation is back on the march

Yesterday brought troubling news on the inflation front as the US CPI measure of inflation rose to 5.4%. Personally I was more bothered by the annual rise of 0.9% due to the problems at the moment with annual comparisons created by the Covid pandemic. That set something of an underlying theme for the UK release this morning so to any logical person it is rather curious to find this being reported by in this instance Ed Conway of Sky News.

UK CPI inflation rises above expectations again. Up to 2.5% in June.

If you had not be following the producer prices data we check each month you did get a clue from the US yesterday. It has different specific circumstances but broad trends for and other commodities will be in play.

Thus this was not really a surprise at all.

The Consumer Prices Index (CPI) rose by 2.5% in the 12 months to June 2021, up from 2.1% to May; on a monthly basis, CPI rose by 0.5% in June 2021, compared with a rise of 0.1% in June 2020.

We can break it down but the initial one helps a bit but as you can see whilst goods inflation is higher by the standards of this the gap is not large. However goods prices have seen a particular acceleration.

The CPI all goods index annual rate is 2.8%, up from 2.3% last month……The CPI all services index annual rate is 2.1%, up from 1.9% last month.

We can take that further although the official analysis is only for the similar CPIH as they try to force people to use their widely ignored favourite.

There were upward contributions to the change in the CPIH 12-month inflation rate from 9 of the 12 divisions, partially offset by a downward contribution from health.

So the move was fairly broad and we can specify it more.

The largest upward contribution (of 0.08 percentage points) to the change in the CPIH 12-month inflation rate came from transport, where prices rose by 1.3% between May and June 2021, compared with a rise of 0.5% between the same two months of 2020. The effect was principally from second-hand cars and motor fuels.

The second-hand car effect was something seen in the US where the unadjusted annual number was 45.2%. A lot of reliance was placed on the seasonal adjustment which reduced it to 10.5% as you can see by the difference in the numbers. The UK situation is not so different with second-hand cars seeing a monthly price rise of 4.4%. In terms of the technicalities they have reduced the weight by 20% which has proved convenient in keeping recorded inflation low but looks a clear mistake in hindsight.

Due to second-hand cars, where prices overall rose this year but fell a year ago. There are reports of prices rising as a result of increasing demand. This follows the end of the latest national lockdown and with some buyers turning to the used car market as a result of delays in the supply of new cars caused by the shortage of semiconductor chips used in their production.

That category was also impacted by rises in fuel prices of the order of 2.4 pence per litre which meant a 2% rise on the month for fuels.

Next come something rather troubling for those relying on seasonal adjustment.

A final, large, upward contribution (of 0.05 percentage points) came from clothing and footwear. Prices, overall, rose by 0.8% between May and June this year, compared with a fall of 0.1% between the same two months a year ago. Normally, prices fall between May and June as the summer sales season begins  but the seasonal patterns have been influenced by the timing of lockdowns since the onset of the coronavirus pandemic.

The US Bureau of Labor Statistics which adjusted US used car prices so heavily may have an itchy collar when reading that.

The ongoing issue of how to treat prices in area’s which see heavy discounting or the same from going in and out of best-seller charts swung the other way this month.

The largest downward contribution of 0.06 percentage points came from games, toys and hobbies, where prices fell this year but rose a year ago, with the main effects coming from computer games and games consoles.

Also the rate of increase of prices for pills,lotions and potions has faded.

A partially offsetting, small downward contribution (of 0.03 percentage points) to the change in the CPIH 12-month inflation rate came from health. Prices of pharmaceutical products, other medical and therapeutic equipment rose by 0.8% between May and June 2021, compared with a larger rise of 3.1% between the same two months a year ago.

Tax Cuts

There have been some indirect tax cuts of which the largest has been the cuts to VAT. If you fully factor them in then the inflation episode is a fair bit larger.

The annual rate for CPI excluding indirect taxes, CPIY, is 4.2%, up from 3.8% last month.



No perhaps it will not all be passed through but even if you halve the impact you end up at 3.4%

Housing Costs

This has been a contentious issue for some time and the heat is not only on it is getting hotter all the time. Why? Well the official view is this.

The OOH component annual rate is 1.6%, up from 1.5% last month. ( OOH = Owner Occupiers Housing Costs)

I had to look that up because they quote all sorts of numbers to try to hide what is so obviously embarrassing. Even the man from Mars that Blondie sang about is probably aware that house prices are soaring and will be wondering how costs are only rising .

by that little? Especially when only 2 and and half hours later we are told this.

UK average house prices increased by 10.0% over the year to May 2021, up from 9.6% in April 2021.

So prices are up 10% but costs only by 1.6%! So what fell? Well mortgages are doing little so our official statisticians have to explain how their smoothed ( it is up to 16 months out of date) number for rents which do not exist impacts with reality.

After all how can you add soaring housing costs to the CPI at 2.5% and manage to then get 2.4% as CPIH does…..

I have regularly pointed out that this is an area of strength for the Retail Prices index or RPI and the reason why is shown below.

Annual rate +4.3%, up from +3.8% last month

It is picking up the rises that everyone can see much more accurately and let me specify that. It uses house prices via depreciation which is good but even it is handicapped by the smoothing process I described earlier and would change given the chance. If so it would give a higher reading right now and be a better measure.


I thought you might enjoy my perspective on the official inflation view..

The official inflation story
1. There wont be any
2. It will be transitory
3. It was above expectations
4. It is too late to do anything about it now.

Next there is the house price issue which if we put into the CPI measure at current weights would put it at 4%. Regular readers will have noted Andrew Baldwin commenting on this and so let me refine it. In reality if they let house prices in they will have the weights even though no brick is moved,window opened or door closed. But even if we so that we get to 3.2% and the Governor of the Bank of England is in the zone where he has to write an explanatory letter. That would be awkward as this afternoon the Bank of England will buy another £1.15 billion of UK bonds in an attempt to raise the inflation rate.

Looking ahead we see that whilst the shove is not as large as last month there still is a large one.

The headline rate of output prices showed positive growth of 4.3% on the year to June 2021, down from 4.4% in May 2021.

The headline rate of input prices showed positive growth of 9.1% on the year to June 2021, down from 10.4% in May 2021.

The monthly rise for output prices was 0.4% so the beat goes on. In terms of the input ones there was a 0.1% dip but this was mostly driven by the swings in oil so we need to check again next month.

Meanwhile is some action building in services inflation?

The annual rate of growth for the Services Producer Price Index (SPPI) showed positive growth of 2.0% in Quarter 2 (Apr to Jun) 2021, up from 1.3% in Quarter 1 (Jan to Mar) 2021.

What are lower bond yields telling us?

A major story in 2021 so far has been the moves in bond yields. This matters because they have become more significant in economic terms during the credit crunch. A factor in this is the way that the ZIRP era of effectively 0% official interest-rates has pretty much stopped the game there for now. For example the US Federal Reserve is presently trying to stop more US rates going below zero. Even the European Central Bank which has applied negative interest-rates for some years now thinks it is at its limit as we learn from the denial below.


Putting it another way their last move was a paltry 0.1% cut to -0.5% although of course they sneaked in a -1% for the banks.

If we step back and ask why?The answer comes from the early days of the credit crunch when official interest-rates were slashed but economies did not respond as the central bankers hoped they would. In effect they thought they had more economic power than they did as longer-term interest-rates cocked something of a snook at them. So we got QE bond purchases in an attempt to control them as well, but whilst this has been associated with lower bond yields the link has been far from what you might think.

Last Night

Whilst many of us in the UK had our eyes on Wembley last night the Federal Reserve released the minutes of its most recent meeting.

On net, U.S. financial conditions eased further, led by a decline in Treasury yields.

Remember this was from mid-June and in terms of central banker psychobabble you can explain it like this.

Lower term premiums appeared
to be a significant component of the declines, as reflected by lower implied volatility on longer-term interest rates.

There had also been bad news for those using real yields as a measure.

The median 2021 core personal consumption expenditures (PCE) inflation forecast from the Open Market Desk’s Survey of Primary Dealers jumped nearly 1 percentage point from the previous survey. However, median forecasts for 2022 and 2023 each rose less than 0.1 percent, suggesting expectations for inflationary pressures to subside.

The Federal Reserve is of course desperate to emphasis anything agreeing with its claim that inflation will be transitory. But the problem for those seeing things in real yield terms is that the higher inflation forecasts should lead to higher bond yields and we got lower ones. Oh Well! As Fleetwood Mac would say.

Oh and I did point out earlier that the Federal Reserve is trying to stop short-term rates going below zero.

Amid heightened demand and reduced supply for short term investments, the ON RRP continued to maintain a
floor on overnight rates.


Here things get a little awkward again. Because any reduction in the current rate of purchases ( $80 billion of US Treasury Bonds and $40 billion of Mortgage-Backed Securities a month) should lead to higher bond yields. Except for all the talk it still seems some way away.

In coming meetings, participants agreed to continue assessing the economy’s progress toward the Committee’s goals and to begin to discuss their plans for adjusting the path and composition of asset purchases. In addition, participants reiterated their intention to provide notice well in advance of an announcement to reduce the pace of purchases.

This backs up this from the statement at the time.

The Committee expects
to maintain an accommodative stance of monetary policy until these outcomes are achieved


An exaggeration but there is a point behind it. Highlighted in a way by this from Reuters.

“If we do see a further drop in interest rates, if we do get below that 1.3% level in any kind of meaningful way, that is going to confirm that growth over value has returned and it is not just a head fake,” said Matt Maley, chief market strategist at Miller Tabak.

Actually the US ten-year yield is 1.26% as I type this as we wonder if that is meaningful enough for Mr. Maley? This compares to 1.78% earlier this year as the yield party peaked and 1.6% just after the Federal Reserve meeting and its hints of a couple of interest-rate rises in 2023. So if you have been long bonds well played.

Back to the economic implications and we start with the US government being able to borrow very cheaply again. Related to that is that long bond (30 year ) yield and its impact on mortgage rates.

Mortgage rates have fallen fairly consistently over the past 2.5 weeks with the past 2 days seeing some of the better improvements…….

They have the 30-year at 3.07% with Freddie Mac going below 3% to 2.98%. I doubt today’s fall to 1.88% for the long bond is factored in but of course the day is not over and things might change.

The International Effect

We can see one via Yuan Talks.

#China‘s most-traded 10-year #treasury futures extend gains to more than 0.5% to hit the highest since Aug, 2020. The yield on China’s 10-year govt bonds drops by 6.25 bp and break through 3% mark to hit 2.9925%.

If we switch to Europe one of my subjects this week – France- has seen its ten-year yield move to a whisker away from 0% this morning. Germany has a thirty-year of a mere 0.15%.

If we travel to a land down under he get a new sort of insight into QE. This is because the Reserve Bank announced a reduction in the rate of it by around 20% from September. The knee-jerk response saw the ten-year yield rise to 1.48% but only a couple of days later it is 1.3%.

The Global Dunces Cap goes to the Bank of Japan. You may recall that a few months ago Yield Curve Control was all the rage. Maybe even fashionable if an economic concept can be. But by pinning the ten-year yield the Bank of Japan stops it from falling and effectively undertake a sort of reverse Abenomics. So it has only moved within the permitted range from 0.06% to 0.02%. I guess that counts as a big move for JGBs these days.

I suspect that has contributed to today’s rally in the Japanese Yen as it moved through 110 although currencies rarely move for one thing alone.


The pendulum keeps swinging in 2021. Markets tend to overshoot but even that theory is awkward now as we note how large the narrative is versus how small the bond yield moves have been. I have worked through plenty of occasions where a 0.5% move would not be considered much and one comes to mind ( White Wednesday 1992) when it was happening if not in seconds in minutes.

Is this a cunning triumph by the US Federal Reserve as some argue? I do not think so as that is way over emphasising their ability. Putting it another way if so they have just poured petrol on the house price rise fire via the impact on mortgage rates.

Switching to the UK we see the same themes in play. The fifty-year yield is back below 1% so the government can borrow incredibly cheaply just as theory tells us it should be getting a lot more expensive. Also we may see more of this.

Record low rate on a 60% LTV 2yr fix of 1.15% in June. No wonder that mortgage mover numbers and house prices are up. Average quoted rates are falling on higher LTVs but still higher than pre-pandemic. ( @resi_analyst )


Are US house prices facing a boom and then bust?

This morning has brought a curious intervention from the President of the Boston Federal Reserve. Eric Rosengren has been interviewed by the Financial Times and gets straight to it.

A senior Federal Reserve official has warned that the United States cannot afford a “boom-and-bust cycle” in the housing market that would threaten financial stability, referring to growing concern about the central bank’s rising property prices.

The curious bit starts with the boom element which seems pretty clear from the development of house prices so far this year.

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported a 13.2% annual gain in March, up from 12.0% in the previous month. The 10-City Composite annual increase came in at 12.8%, up from 11.7% in the previous month. The 20-City Composite posted a 13.3% year-over-year gain, up from 12.0% in the previous month.

I guess he must be grateful that Boston is not one of the leaders of the pack.

Phoenix, San Diego, and Seattle reported the highest year-over-year gains among the 20 cities in
March. Phoenix led the way with a 20.0% year-over-year price increase, followed by San Diego with a
19.1% increase and Seattle with a 18.3% increase.

Although with prices rising at an annual rate of 14.9% it is above the average. Also we see that the monthly rate of increase is on a bit of a charge.

Before seasonal adjustment, the U.S. National Index posted a 2.0% month-over-month increase, while
the 10-City and 20-City Composites both posted increases of 2.0% and 2.2% respectively in March.

Also these moves are very large in historical terms.

“More than 30 years of S&P CoreLogic Case-Shiller data put these results into historical context. The
National Composite’s 13.2% gain was last exceeded more than 15 years ago in December 2005, and
lies very comfortably in the top decile of historical performance. The unusual strength is reflected
across all 20 cities.

So this is unequivocally a boom so in that sense we are half way there.

What else did he say?

He raised a dangerous issue from the Fed’s point of view.

“It’s very important for us to get back to the 2 percent inflation target, but the goal is for that to be sustainable,” Eric Rosengren, president of the Boston Federal Reserve, told the Financial Times. And for that to be sustainable, we can’t have a boom and bust cycle in something like real estate..

The reason why it is dangerous is that real estate is not in the inflation target the much more friendly owners equivalent rent of residencies is instead and it is growing at an annual rate of 2.1% and has been rising at a monthly rate of 0.2% to 0.3%. So very different to the house prices it is supposed to proxy and of course it does not exist and is never paid. So they are at risk of being accused of making the numbers up because in this instance they have and at 23.8% of the index by weight it is a significant amount.

Rather curiously for the FT which is a vociferous supporter of the rental equivalence above it puts the boot into it via the number below.

According to data from the National Association of Realtors last week, the median price of existing home sales rose 23.6 percent year on year in May, topping $350,000 for the first time.

Even Rosengren himself cannot dodge the flying bullets.

Rosengren said that in the Boston real estate market, it has become common for cash-only buyers to prevail in bidding competitions, and that some have refused home inspections to gain an advantage with sellers.

It is kind of him to make my point for me because the more cash-only buyers there are the more my case that house prices should be in the inflation index gets strengthened.

It is hard not to have a wry smile as we note he is not bothered much about the poor buyers who may be over paying but instead focuses his concern on the precious.

“You don’t want a lot of glut in the housing market,” Rosengren said. “I would just highlight that boom and bust cycles in the real estate market have occurred in the United States many times, and around the world, often as a source of financial stability concerns.”

A Problem

This comes from Fed policy which has been at the minimum house price friendly. The most explicit form of this is below and the emphasis is mine.

 In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.

The Fed has been chomping away on these and now owns some US $2.35 trillion dollars worth. Even in these inflated times that is a lot of money and as to its effect let me take you back to January 2009 and the then Chair Ben Bernanke.

 Notably, mortgage rates dropped significantly on the announcement of this program and have fallen further since it went into operation.  Lower mortgage rates should support the housing sector.

That is as near as we will get to an official admission that the plan was to sing along with Elvis Costello.

Pump it up, until you can feel it
Pump it up, when you don’t really need it

These days the official Fed statement is much more euphemistic and circumspect.

These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

Taper Talk

We remain in the dance where they are talking about possibly doing something at some unspecified date.

Federal Reserve officials are now beginning to discuss reducing bond purchases. “When appropriate” to begin that process, Rosengren said, purchases of mortgage-backed securities should be reduced at the same rate as Treasury purchases. This means that direct support for housing finance will end more quickly.

“This means that we will stop buying MBS before we stop buying Treasuries,” he said.

So he would reduce the programmes dollar for dollar which adds another level to this as rather than simply stopping purchases he would start to turn the tap off. So this saga seems set to run and run which is revealing. Maybe we might reach the end of the beginning this year.

Given the rapid recovery, Rosengren said, “It is likely that the conditions to consider whether we have made more substantive progress before the start of next year will be met.”

We finish with that central banking standard of the two-handed economist.

“There is a great deal of uncertainty in the forecast,” Rosengren said. Some people will grow very fast [and] The terms of the tightening policy may apply sooner. And other people will think the recovery will be a little slower.”


This is what you call a hot potato. The US Federal Reserve threw everything it had at the US housing market in March 2020 and is now being forced to at least acknowledge the consequences. It can no longer get away with only pointing to claimed wealth effects as many see this.

U.S. households added $13.5 trillion in wealth last year, according to the Federal Reserve, the biggest increase in records going back three decades. Many Americans of all stripes paid off credit-card debt, saved more and refinanced into cheaper mortgages. That challenged the conventions of previous economic downturns. In 2008, for example, U.S. households lost $8 trillion.

Through this lens.

More than 70% of the increase in household wealth went to the top 20% of income earners. About a third went to the top 1%……..The Americans who gained the most during 2020 were the ones who had much more wealth to begin with. Houses, stocks and retirement accounts—which wealthier people are more likely to own—soared in value, and those boosts are likely to endure.

From that we can answer my question at the top of this piece. We have yes to the boom but the Federal Reserve response to any bust will be “over my dead body” which means that they have made the same mistake as they did in the credit crunch.

We’re caught in a trap
I can’t walk out
Because I love you too much, baby ( Elvis Presley)


A different tack this week as I was interviewed by Jana Hlistova for The Purse Podcast.




Was the Fed a case of Much Ado About Nothing?

We have become used to central banking being a bit dull, certainly compared to March last year. They essentially opened the monetary taps and have spent the intervening period not doing much. We have had some fiddling at the edges and a lot of open mouth operations, but last night the stakes were higher because of the pace of the recovery in the US economy. If we move to the effect we can see that markets made an immediate response.

After FED meetings, gold fell down significantly in the last Newyork session, from $1860/oz to $1800/oz, then went up back to $1820/oz ( @fxstreet)

So Gold was hit immediately and the futures contract is at US $1810 this morning meaning that $50 was knocked off its price. So it has been a bad 24 hours for Gold bugs and places were it is held such as India. This gives us our first hint of some news about interest-rates.

Hollar Dollar gives us the picture.

At 3:15 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was traded 0.2% higher at 91.418, after surging nearly 1% overnight, its biggest rise since March of last year.

The rally meant that we have seen some big figure changes with the Euro pushed below 1.20 and the UK Pound £ pushed below $1.40. They should not matter but often do. Also there was some relief for the Bank of Japan as the Yen weakened to 110.60 as it continued a weaker run for the Yen since the days it ended up being pinned around 104.

Bond Markets

Having established a theme of financial markets responding to something about interest-rates we now move to one which gives a qualified response. What I mean by that is yes we get some confirmation from a 0.07% rise to 1.56% for the US ten-year yield but it is not a large move. Also bond yields had been falling for the last couple of weeks so net we are still lower.

The Federal Reserve

The initial statement only gave is a couple of hints.

 Amid this progress and strong policy support, indicators of economic activity and employment have strengthened.

So some confirmation of an improvement and we also got the beginnings of covering their backside on inflation via the use of “largely”

Inflation has risen, largely reflecting transitory factors

But neither of those explain the market response. Nor does the interest-rate change which was announced.

The Board of Governors of the Federal Reserve System voted unanimously to set the interest rate paid on required and excess reserve balances at 0.15 percent, effective June 17, 2021.

The 0.05% move was also applied to the troubled reverse repo market which went from 0% to 0.05% and we see why from this.


We have looked at this several times before where the monetary push from the Federal Reserve has been added to by the fiscal stimulus and the cheques in particular leaving the banking system awash with cash. The pressure has been such there has been a danger of negative interest-rates spreading ( we have seen some in US Treasury Bills). I know it is an irony but the Fed is now acting to stop further falls in interest-rates. Or as Stevie V put it.

Money talks, mmm, mmm, money talks
Dirty cash I want you, dirty cash I need you, ooh

The US Treasury has been asleep here as it could have helped by issuing some more bonds, it is not as if it will not have deficits to finance.


More meat came here.

However, the jolt came when new projections saw 11 of 18 central bank policy makers plan for two interest rate increases of 25 basis points in 2023, a year earlier than expected, and a sharp change from the previous meeting when none of these officials were looking for hikes during that year.  (

Such was the shift that the projection had a 0.6% expectation for interest-rates in 2023 or two 0.25% hikes from the present 0.1%. This led to this perception.

“With the world’s so-called ‘smartest market’ expecting a quicker and more aggressive liftoff in interest rates, the fallout from this Fed meeting could continue to drive all markets in the days and weeks to come,” said Matthew Weller, Global Head of Market Research at GAIN Capital. (

I have no idea how he could consider that to be aggressive but each to their own. As to the meaning of the shift well I well leave that to Chair Powell.

FED Chair Powell: Not Appropriate To Lay Out Numbers That Mean Substantial Further Progress

Dots Are Not A Great Forecaster Of Future Rate Moves

– Didn’t Discuss If Liftoff Appropriate In Particular Year  (@LiveSquawk )

This is a bit awkward because having sent a signal about higher interest-rates you then say that it does not mean much. Ironically he is of course correct with the statement that central bankers are not great forecasters of future rate moves, and he has thus just torpedoed the “Forward Guidance” claims that have been pressed over the past few years. It gets more awkward as we note they have predicted a “Liftoff” in 2023 but didn’t discuss it. What did they discuss then?

If we return to the dot plot then we see this from Chair Powell back in March 2019.

Each participant’s dots reflect that participant’s view of the policy that would be appropriate in the scenario that he or she sees as most likely.

That could be from Sir Humphrey Appleby in Yes Minister.

Taper Talk 

Essentially it remains that because there is no change.

 In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.


In some ways this echoes the much ado about nothing line from William Shakespeare. The Fed has sent a signal with its forecasts but it is hard not to smile at reports it is being hawkish, especially when CPI inflation is at 5%. Also raising interest-rates in 2023 is an inversion of monetary policy leads and lags with inflation higher now. If it is transitory then why bother? Indeed I could go further because in its forecasts is the assumption that the “normal” level of interest-rates is now 2.5%, does anyone actually believe that? None of this deals with house price rises in double-digits.

The Tapering of QE is an issue where some will keep talking about it and claim to be right should it happen forgetting the failed lottery tickets they previously bought. But my view is that the central banks are all hoping someone else will move first. I know that the Bank of Canada has acted but having bought around 40% of the market in short order it soon would have been out of road anyway.

So we are left with markets and if they have pushed the US Dollar upwards and it persists then they may have achieved something. Although did they intend to? Also we have the nuance which is do we have a clear cause and effect or were markets waiting for a trigger and without the Fed something else would have come along?

Also we saw a bit of insurance taken out against the future.

The Federal Reserve on Wednesday announced the extension of its temporary U.S. dollar liquidity swap lines with nine central banks through December 31, 2021

So they can use the word temporary…….




Does higher inflation mean higher economic growth?

The issue of inflation is a hot topic in economics right now. Indeed this morning has suggested that to quote Glenn Frey the heat is on in India.

The wholesale price-based inflation hit an all-time high of 12.49% in May on the back of a spike in prices of manufactured products, crude petroleum, and mineral oils.

It touched the double-digit mark of 10.49% in April (2021). This is the fifth straight month of an uptick in WPI inflation. ( Business Today)

It is the five months in a row of rises which bothers me more than the all-time high which is influenced by the pandemic driven lows of last year. The vibe has also been reinforced by this.


So the issue in May has pushed into June and as an aside a higher oil price has negative consequences for the Indian economy. But for out purposes today the issue is one of inflation risks.

The Reserve Bank of India

We can stay on the sub-continent for the latest central banking missive assuring us that inflation is good. Earlier this month the RBI produced a working paper looking at this.

The concept of threshold inflation is linked to the level of inflation beyond which it becomes detrimental to economic growth.

There are a lot of begged questions in the assumptions but applying them to India the researchers get to this.

 For macroeconomic policy targets consistent with maintaining fiscal deficit at 6.0 per cent and current account deficit at 2.0 per cent of GDP, our estimates suggest a threshold inflation level of 6.1 per cent and optimal growth rate of 7.5 per cent for India.

As you can see they are juggling several plates at once but in principle they are replicating the western approach. What I mean by that is we are seeing an attempt to raise the inflation target by 50% or from 2% to 3%. Well in India a 50% rise takes you from 4% to 6%. The extra 0.1% is the same as when Everest was estimated to be 28,000 feet high so they made it 28,002 as otherwise they thought they would not be believed.

They then ram their point home in case we missed it.

If we consider the inflation target at 4 per cent instead of the threshold level of 6 per cent, the long-term growth rate would decline by about 80 bps.

By contrast if you miss the inflation target on the upside the issues created are relatively smaller, in fact much smaller.

On the other hand, if we consider the inflation target of 8 per cent instead of the threshold level of 6 per cent, the long-term growth rate would decline by only about 30 bps.

I suppose it is kind of them to so explicitly confirm one of the themes of my work.

 Thus, the trade-off between long-term inflation and growth is not symmetric on both side of the threshold inflation.

If you prefer it can be expressed in terms of economic growth.

When the inflation target is less than the threshold level, the sacrifice is 0.4 per cent point growth per one per cent point reduction in long-term inflation. However, if the inflation target exceeds the threshold level, the sacrifice of growth is only 0.15 per cent point per one per cent point increase in the long-term inflation.

Extraordinarily clever for a number if not picked at random has in fact been pulled out a hat.

The claimed gains are put up simple terms for politicians.

If the threshold inflation rate is somehow considered to be too high, the policy makers can choose a lower inflation target only by consciously sacrificing long-term real growth of GDP.


In a country with so many poor I am sure that pretty much everyone reading this with thing of it as a big deal.

 Of course, there are arguments in favour of lower inflation rate in terms of its favourable redistribution impact particularly on the poor and the financial stability concerns.

The problem here is one of the swerves in this type of analysis which appears in the early part.

The Keynesian analysis of non-neutrality of money assumes that nominal wages are more rigid than prices. Increase in money resulting in higher price level, therefore, leads to a decrease in real wages that would bring about an improvement in real economic activity (Rangarajan, 1998). This was loosely interpreted to mean higher inflation resulting in higher growth.

They deny this is being used and instead point to this.

 In an open economy, the rate of inflation can become an important determinant of the steady state rate of growth. It can influence TFPG through its effect on investment and effectiveness of research and development expenditure (Briault, 1995).  ( TFPG = Total Factor Productivity Growth )

Thus they are in fact assuming that higher inflation leads to higher economic growth via what we have come to call the “productivity fairy”. Personally I do not see a link between inflation and productivity. Also on the dynamic world in which we live and exist there is no “steady state rate of growth” and the conclusion is thus castles in the sky.

 Thus, the steady state growth would occur at the threshold inflation in an economy left to market forces. Since this is a base case, the government can avoid unnecessary adjustment costs in practice by targeting long-term inflation and growth respectively at the threshold inflation and steady state growth.


The conclusion is an interventionist and central planners dream. It feels like something from the 1960s and 70s with a “white-heat of technology” add on. In the credit crunch era we have seen a familiar trend where such ideas start with a single central bankers and the spread. Some years back it was Charles Evans of the Chicago Fed pushing the higher inflation target line and now we see it has become official policy.

With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent.

Actually that is now out of date as inflation is not only above target but if the May CPI reading is any guide may well be considerably above it.

Where this falls down is that the research is designed to come to the conclusion that it does. I have already highlighted the productivity issue and with it comes the related one of wages and real wages in particular. This has been a troubled area for years and maybe decades for example the “lost decade” in Japan is one of a lack of real wage growth and my home country the UK has struggled too. Thus, in my opinion, and there is plenty of evidence to back it up you cannot simply assume higher inflation will lead to higher wage growth. The nominal wage rigidities of economic theory have got worse. We see examples of this regularly in the news and this may well be backed up by official numbers too.

Real average hourly earnings for all employees decreased 0.2 percent from April to May, seasonally
adjusted, the U.S. Bureau of Labor Statistics reported today…..Real average hourly earnings decreased 2.8 percent, seasonally adjusted, from May 2020 to May 2021.

Then we have the issue of assuming a steady-state for an economy at a time when we have seen waves of uncertainty. It is hard not to laugh as the theorists describe their theoretical world but describe one which has not much of a relation to the real one leaving us Seasick like Steve.

Cause I started out with nothing
And I’ve still got most of it left


Digital Currencies are on their way accompanied by negative interest-rates

The issue of a digital currency is something that is increasingly occupying both the minds and the attention of central bankers. This morning has given another example of that because as I was about to look at a couple of developments this appeared on the news wires.

Hong Kong monetary authority says it will explore issuing an e-HK dollar ( @PriapusIQ )

It would be simpler if we got a list of central banks that are not looking at it! They all have the two main drivers for this. The first is that digital currencies provide a challenged to the banks or as central banks see it “The Precious! The Precious!”. The next is their fear of the consequences of what they call the lower bound for interest-rates. Whilst this has clearly got lower to the embarrassment for example of Governor Carney of the Bank of England who assured us several times it was 0.5% in the UK and then helped to reduce it to 0.1%. There are fears in the central banking community that many have got close to if not at as low as they can go. There is a reason the ECB has not cut its deposit rate below -0.5%. So we move onto their plans for in some cases negative interest-rates in the next recession ( UK) and deeper ones ( Euro area)

Money Money Money

The issue here is the role of banks in the creation of money. Here is the Bank of England explaining this yesterday.

In the modern economy,most money takes the form of bank deposits. The principle way these deposits are created is through commercial banks creating loans.

We see here much of the reason for the central banking view that banks are “The Precious! The Precious!” and it continues.

Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. For example, when a bank extends a mortgage to someone to buy a house, it does not typically do so by giving them thousands of pounds of bank notes. Instead, it credits their bank account with a bank deposit the size of the mortgage. At that moment money is created.

It is revealing I think that that they choose a mortgage as an example rather than business lending. But the real point here is the vital role of banks in most money creation in our monetary system. It is this that is the real “high powered money” rather than the version in the theories of economics text books which focused on central banks. If that had been right QE would have launched economies forward and we would not be where we are.

Banks are not limited as many think by some rule in the form of a money multiplier. The UK has not had anything like that for some decades. There is a limit from this.

Banks are limited in how much they can lend if they are to remain profitable in a competitive banking system.

Although that has had quite a bit of trouble as banks have in modern times struggled to make much if any profit at all. They have required quite a bit of help and some collapsed quite spectacularly with large losses. Another potential limit is prudential regulation which as I am sure you have spotted ties the banks ever more closely to the central bank.

In some ways the main restriction these days comes from us.

for instance they could quickly “destroy” money by using it to repay their existing debt.

This has been happening in the world of UK unsecured credit as highlighted a few days ago.

Individuals have made significant net repayments of consumer credit since March 2020 (Chart 2). The further net repayment of £0.4 billion in April this year was, however, less than seen on average each month over the previous year (£1.7 billion).

It is rarely put like this but money has been “destroyed”. How very dare they! Won’t anybody think of The Precious?

For a central bank replacing this with Facebook’s currency or one from any of the other tech giants in existence or about to start does not bear thinking about. It may even have been a string factor in the new apparent enthusiasm for taxing them.

Negative Interest-Rates

This is the fantasy world of central bankers thus we find that the road to negative interest-rates is described as one with higher ones.

In response to deposits migrating to new forms of digital money, banks are assumed to compete for deposits. And they do this by offering higher interest rates.

Actually Bank of England policy ( Funding for Lending Scheme and the various Term Funding Scheme’s) has been designed to avoid this for some time. Indeed this has not really happened since our favourite Charlie Professor Sir Charles Bean promised it back in September 2010.

 “It’s very much swings and roundabouts. At the current juncture, savers might be suffering as a result of bank rate being at low levels, but there will be times in the future — as there have been times in the past — when they will be doing very well.

Actually Sir Charles has done really rather well adding the Office of Budget Responsibility and a Professorship at the LSE to his RPI-linked pension. Savers meanwhile have been stuck on the roundabouts.

Returning to its scenario the Bank makes various assumptions which lead us to this.

The interest rate banks pay on long-term wholesale funding is typically higher than on deposit funding. Other things equal, replacing lost deposits with more long-term wholesale funding therefore implies an increase in banks’ overall funding costs.

This leads us to banks charging more which many people will be familiar with. After all banks are perfectly capable of managing that without all the assumptions and intellectual innovation displayed in the discussion paper.

Under this assumption, both funding costs and bank lending rates rise by around 20 basis points.

In fact a 0.2% increase on overdraft rates which these days are 30% plus would hardly be noticed nor on credit cards. Commercial borrowing is something that may act differently mostly I think due to scale.

Under the illustrative scenario, it is assumed that some corporate borrowers find it cheaper to take advantage of credit opportunities in the non-bank sector. For example, medium-sized UK companies who were previously unwilling to accept costs associated with non-bank sources of credit, but who now find it cheaper to do so than borrowing from a bank.


This is another step on the road to ever lower interest-rates combined with central bankers twisting and turning to find a future for the banks. This is because the system as it stands suits them both.

Monetary policy is mainly implemented by setting the interest rate paid on reserves held at the central bank by commercial banks. This interest rate is known as Bank Rate.

Or at least that is their view because as we look around we see that it has in fact become less and less relevant.

Towards the end of the paper – and thus less likely to be reported- we end up at our destination though.

If it was preferred to cash, a central bank digital currency could also soften the lower bound on monetary policy.

Here is the Bank of England version of this.

In principle, a CBDC could be used, in conjunction with a policy of restricting the use of cash. If the interest rate on the CBDC could go negative, this could soften the effective lower bound on interest rates and lower the welfare loss associated with the opportunity cost of holding cash.

Actually you just set an exchange-rate between the two as the IMF suggested and Hey Presto! You have -2% or -3% and a strict form of financial repression.




Secretary Yellen shifts the fiscal policy goal posts

The weekend just gone brought with it a clear hint of economic policy ahead. It came from the US Treasury Secretary Janet Yellen who is in the process of making something of a transition. Like Mario Draghi in Italy she is making the switch from supposedly independent central banker to politician. Both as they have emerged from their chrysalis have become advocates for fiscal policy but Janet is taking things a step further.

G7 economies have the fiscal space to speed up their recoveries to not only reach pre-COVID levels of GDP but also to support a return to pre-pandemic growth paths. This is why we continue to urge a to shift in our thinking from “let’s not withdraw support too early” to “what more can we do now.” Not just to end the pandemic, but to use fiscal policy to invest in addressing generational issues like climate change and inequality.

She has clearly gone further than this below which we had become used to.

Fiscal policy has an important role to play in responding to crises and supporting the recovery. The IMF projects that the U.S. will be the first G7 economy to return to its pre-pandemic output level. That’s in part due to our rapid vaccine rollout, but also ambitious fiscal support in policies like the American Rescue Plan.

So as well as the fiscal plan to get the US economy going again we can expect “More,More, More” from the Biden administration. Indeed in her replies to the press Secretary Yellen offered the same prescription to everyone else.

And we think that most countries have fiscal space, and have the ability to put in place, fiscal policies that will continue promoting recovery and deal with some of the long-run challenges that all of us face when it comes to climate change and inclusive and sustainable growth, and we urge countries to do that.

This is a challenge to what we were told at the end of last month by the President of the German Bundesbank Jens Weidmann.

“It must be clear to all that we are not putting monetary policy into the service of fiscal policy,” the Bundesbank President said. “It is essential to keep fiscal assistance measures targeted and temporary to reduce the likelihood of conflicts arising between monetary and fiscal policy.”

Indeed Jens then if anything went further here.

Mr Weidmann also cautioned against letting the current high degree of government intervention in the economy become the new normal.

A Worldwide Move

As well as the promises of US action and urges for other developed nations to do the same there was this.

The G7 reiterated our support for a new allocation of IMF Special Drawing Rights to boost global reserves and provide additional liquidity as IMF members confront the crisis. We strongly support the IMF providing clear, tailored guidance to countries on how best to utilize their new SDRs, as well as proposals to increase transparency in and accountability for how SDRs are used.

There is a merging of monetary and fiscal policy here. At the start this is an expansion of the world money supply via an increase in SDRs. But it will quickly become fiscal policy as the IMF spends the funds that have just been raised. Politicians love this sort of thing because it is near to a “free lunch” they will get because there is no-one with any ability to object such as those pesky voters.

We wait to see how much of an increase there will be in this.

So far SDR 204.2 billion (equivalent to about US$293 billion) have been allocated to members, including SDR 182.6 billion allocated in 2009 in the wake of the global financial crisis.

The US Treasury has previously suggested this.

To this end, Treasury is working with IMF management and other members toward a $650 billion general allocation of SDRs to IMF member countries.

As you can see it would be quite an expansion and perhaps at some point they will key us know who needs global reserve assets? Apart from them of course.

Addressing the long-term global need for reserve assets would help support the global recovery from the COVID-19 crisis

Back in the USA

Before we reach the international environment there are a couple of elephants in the room as we note the subject du jour appearing again.

Q: I guess some people would say seeing U.S. inflation where it is, seeing the serious sheer size of the public deficits, not just in your country but around Europe, you’re now saying go even further.

Which got this response.

SECRETARY YELLEN: Well, we have in recent months seen some inflation. And we, at least on a year-over- year basis will continue, I believe through the rest of the year, to see higher inflation rates, maybe around 3 percent.

If she is a De La Soul fan then there is some logic to this.

That’s the magic number
Yes it is
It’s the magic number

But in reality she is trying to get away with as small a number as she can. Also I am sure you were all waiting for this bit.

But I personally believe that this represents transitory factors.

As everything ends she will be right but we may all be poorer well before then. Also she seems to be doing some cherry-picking.

 without affecting the underlying inflation rate

Like house prices which do not appear in either of the 2 main inflation measures? Ignoring something rising at over 10% per annum and replacing it by something rising at more like 2% helps you tell people inflation is low. The problem comes when they have to actually pay their bills.

In essence Secretary Yellen is saying the US government is targeting this.

Look, we still have over 7 million fewer jobs right now than we had pre-pandemic.

The catch is the assumption that fiscal policy fixes all ills. No doubt some will benefit but if the numbers are a result of structural changes in the economy others may not.


When interviewed by Bloomberg Secretary Yellen gave a different perspective.

“If we ended up with a slightly higher interest rate environment it would actually be a plus for society’s point of view and the Fed’s point of view,” Yellen said Sunday in an interview with Bloomberg News during her return from the Group of Seven finance ministers’ meeting in London.

This is an issue we looked at on the 5th of May when Secretary Yellen also seemed to think she still had her old job as head of the Federal Reserve. Actually whilst we did see a shift upwards in bond yields earlier this year they have if anything retraced a little in the last couple of months.


There is a clear attempt here to open a path to more expansionary fiscal policy outside the US. Whilst it does not get a mention ( with may be very revealing) this is an issue for a fiscal stimulus.

The U.S. monthly international trade deficit increased in March 2021 according to the U.S. Bureau of Economic Analysis and the U.S. Census Bureau. The deficit increased from $70.5 billion in February (revised) to $74.4 billion in March, as imports increased more than exports.

Expansions elsewhere and hence more demand for US exports would help with this.

The next issue is inflation as we get told that any response will be too late.

And while we’re seeing some inflation, I don’t believe it’s permanent. But we will watch this very carefully. I don’t want to say, “this is mind absolutely made up and closed.” We’ll watch this very carefully, keep an eye on it and try to address issues that arise if it turns out to be necessary.

It looks as though we will be discussing the fiscal multiplier ( how much bang you get for your buck) quite a bit over the next year or two.



Can the US Federal Reserve Taper and QT this time around?

A feature of 2021 so far has been the discussion over what the US Federal Reserve will do next? One factor in this has been the extraordinary amount of monetary stimulus it has pumped into the US economy with near zero interest-rates and a balance sheet expanded to just shy ( 7.92) of 8 trillion US Dollars. That compares the the previous peak of around 4.5 trillion back in 2015. On Monday the New York Fed gave us its view on what may happen next.

The exercise suggests that the SOMA portfolio could grow
through ongoing asset purchases to reach $9.0 trillion by 2023, or 39 percent of GDP. The portfolio is then assumed to be held constant, with proceeds from maturing securities being reinvested. After that point, the path of the portfolio will depend on choices made regarding the portfolio as the FOMC normalizes the stance of monetary policy.

These days normalizes does not mean what it did as those who recall its use back in 2018 or so will recall it meant interest-rates of around 3%. The reason for the expected expansion in the balance sheet is that the New York Fed is still buying at a fairly rapid rate.

In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per
month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum
employment and price stability goals.

The Economic Outlook

For this quarter we are being told this.

The New York Fed Staff Nowcast stands at 4.6% for 2021:Q2.

Later this afternoon the numbers for the first quarter will be revised and the New York Fed is expecting an increase to over 6%. The numbers are annualised but in our terms a bit over 1% and then around 1.5% are strong numbers. This has been added to by the Markit IHS business survey.

Adjusted for seasonal factors, the IHS Markit Flash
U.S. Composite PMI Output Index posted 68.1 in
May, up from 63.5 in April. The rate of expansion
was unprecedented after surpassing April’s
previous series record.

They went further.

At the same time, new export business rose at the fastest pace since the series covering both manufacturing and services began in September 2014.

Mostly we have seen manufacturing pick up and services lag but the US has moved beyond this according to Markit.

The seasonally adjusted IHS Markit Flash U.S.
Services PMI™ Business Activity Index
registered 70.1 in May, up from 64.7 in April. The
rate of expansion was the sharpest since data
collection for the series began in October 2009.

So the outlook for 2021 looks to be singing along with the Black Eyed Peas.

Boom boom boom
That boom boom boom
That boom boom boom
Boom boom boom


We have previously looked at an inflation rate ( CPI) of 4.2% and house price rises in double digits. The Markit survey above reinforced curreny concerns here.

Inflationary pressures continued to mount in May,
as rates of increase in input prices and output
charges quickened to the steepest on record.
Companies commonly noted efforts to pass through
soaring costs to clients, with prices of oil, PPE and
transportation often cited as fuelling the uptick in

They think this will be felt in the consumer inflation numbers.

Average selling prices for goods and services are both rising at unprecedented rates, which will feed through to higher consumer inflation in coming months.

Forward Guidance

Remember when we were supposed to listen to the open mouth operations of central bankers so we would be better informed about interest-rates? That went really rather wrong. But we can look at what is being said by central bankers who seem to have forgotten that. On Tuesday Mary Daly of the San Francisco Fed was interviewed by CNBC.

“We haven’t seen substantial further progress just yet. We’re still looking for substantial further progress,” Daly said during a live “Closing Bell” interview. “What we’ve seen is some really bright spots, some very encouraging news. It gives me hope, and I am bullish for the future. But it’s too early to say that the job is done.”

As to policy she told them this.

“We’re talking about talking about tapering, and that is what you want out of us. You want to be long-viewed here,” she said. “But I want to make sure that everyone knows it’s not about doing anything new. Right now, policy is in a very good place. Policy is supporting the American people.”

God knows where she is going with “talking about talking…” but what we see here is quite a revision of central bank behaviour which is supposed to look ahead along the lines of the famous take away the punch bowl as the party gets started statement. Whereas Mary seems to want to wait with the risk that the party is over before she does anything.

Vice Chair Randal Quarles spoke yesterday and he seemed quite keen on the house price rises.

Highly accommodative monetary policy by the Federal Reserve has fostered strong growth in interest rate–sensitive sectors of the economy such as housing and durable goods, offsetting some of the historic weakness in the service sector last year.

That is at least more honest than the Bank of England as we recall Sir John Cunliffe turning his blind eye to this issue last week. He also brought in the issue of the fiscal stimulus which is in play in the US.

Even as personal consumption expenditures rose at a huge 10 percent annual rate in the first quarter of 2021, the saving rate averaged 21 percent over those three months. Again, a lot of that reflected the most recent round of stimulus payments.

Then something else which would have in the past led his predecessors to raise interest-rates.

The underlying strength in hours and wages lends support to widespread reports that worker shortages are impeding hiring. Labor force participation remains about 3‑1/2 million people lower than before COVID-19.

But he has no such intention.

In contrast, the time for discussing a change in the federal funds rate remains in the future

Only some sort of vague promise to maybe look at tapering or QE reductions at some future date.

If my expectations about economic growth, employment, and inflation over the coming months are borne out, however, and especially if they come in stronger than I expect, then, as noted in the minutes of the last FOMC meeting, it will become important for the FOMC to begin discussing our plans to adjust the pace of asset purchases at upcoming meetings


There are three especially significant starting points for all of this. The US Federal Reserve is the world’s most important central bank due to the size of the US economy and the reserve currency role of the US Dollar. Also the US economy is presently leading us out of the Covid-19 economic malaise. Finally whilst other central banks have reduced purchases of bonds and the flow of QE it is the only one to have cut back the amount or apply Quantative Tightening or QT in 2017-19 when some US $700 billion was pruned.

But now as you can see it looks to be scared of its own shadow and unsure of its role. It raised its inflation target on dubious grounds and now finds that if April was any guide it has underestimated the push the reopening would give it. It seems to be hanging onto QE on two grounds. Fears for what would happen to the US bond market and in case the economy dips at any point. Along the road we are seeing policy swing both ways. Firstly as has been discussed in the comments the market situation has applied a sort of short-term QT.

Demand for an overnight funding through the Federal Reserve Bank of New York’s overnight reverse repo program (RRP) has begun to flirt with recent records highs, after almost no one used it for months.

Daily repo usage jumped to $450 billion on Wednesday, its highest level since the December 30, 2016, according to Fed data. ( MarketWatch)

This is in many ways a response to the fact that some short-term interest-rates rather than rising as you might expect have fallen to 0% in response basically to all the cash in the system.

Another way of looking at all of this is that just as you might reasonably have expected US bond yields to be rising ( the recovery plus inflation) if anything they have drifted lower. Back on the 17th of March when we looked it was 1.63% whereas now it is 1.58%.

If we step back the issue post credit crunch was that they would delay taking the stimulus away. So we are on the verge of the same mistake.