Showing posts with label Fed policy. Show all posts
Showing posts with label Fed policy. Show all posts

Saturday, October 10, 2015

10/10/15: IMF: Un-Clued on U.S. Monetary Policy Normalisation


For all the positivity chatter about the return of the U.S. growth and 'normalisation' of the interest rates environment pushed into the world of unsuspecting journos by the IMF in its latest WEO Regional Outlook: Western Hemisphere, there is a nagging suspicion that something is strangely amiss.

Take the pesky problem of the U.S. monetary policy being exceptionally loose (or accommodative) since 2008. Chart below shows this by plotting a rate gap between policy rate and the 'neutral rate' with negative values indicating accommodation. Note, neutral rate is defined as the rate consistent with the economy achieving full employment and price stability over the medium term. Note also that adding in QE (over and above simple policy rate) pushes the metric of accommodation well beyond all historical comparatives in size (depth) and duration (length of time accommodation is present):


Now, naturally, one would expect these 'accommodative policies' to create a vast sea of surplus (relative to 'natural rate' consistent) liquidity (aka: money) in the U.S. system. And, naturally, one would expect that any 'normalisation' in the monetary policy would entail removing this surplus over time. Which, again, naturally, should translate into higher rates.

IMF obliges, providing us with this handy chart tracing forward expectations for U.S. policy rate:


The lift-off suggested in the chart above is rather steep and is steeper than the lift-off suggested by market pricing of futures (red line). In a sum, the chart above says: We have no idea what 'normalisation' will look like, but let's hope it will be more benign than the Fed signals and Primary Dealers Survey have been.

But here is a pesky little thing: You won't spot the same dynamics in IMF WEO forecast for either inflation or Libor rates. And the reason is pretty obvious: the more aggressive the Fed path in the chart above, the lower are growth projections in the chart below:


IMF forecasts from 2016 out to 2020 fall squarely in line with 2010-2015 averages for GDP growth (aka inflationary pressures) but are in excess of the 2010-2015 average for inflation itself.

In simple terms, despite all the talk about 'normalisation' of rates, the IMF is really saying that through 2020, we can expect the monetary environment (and with it the interest rates outlook) to be more benign than over pre-crisis average. Worse, inflation is expected to accelerate even though growth is expected to slip.

How does any of this square well with the idea of the Fed rate going to 3.75% as projected in the second chart above? Does any of this square well with projected 2016 interest rates for the Fed going to 1.2-1.3% against Libor under 1.2%? Does any of this square well with forecast inflation jump from 0.906% in 2015 to 1.404% and inflation outlook heading toward 2.322% by 2020?

In short, IMF expectations on both Libor and the Fed rate can be very tight.  Especially over the 2016-2018 horizon. If the Fed does stick to its signalled path (chart 2 above), growth will suffer relative to IMF projections (last chart above), despite already heading toward 2010-2015 average by 2019.

In the mean time, none of the IMF forecasts are consistent with Fed policies addressing in any reasonable way the built up of monetary policy excesses of the past.

Welcome to the world of forecasting after ZIRP. Shall we call it Fudge?..

Saturday, August 17, 2013

17/8/2013: Long-Term Great Unwinding for ECB?..


On foot of David Rosenberg's pressie on Long-Term Inflation strategy switch (link here), here's the ECB Monetary Policy dilemma illustrated.

First, the steep hill 'walking':


Per chart above, the wind-in-your-face breezing down the interest rates slopes for ECB is more severe than the Fed trip so far. And the duration of this episode is longer in the ECB-own historical context:


In fact, we are into 55th month now of staying away from the mean and that is for the euro era (already too-low by historical metrics) mean. Last two episodes of deviations lasted 30 and 33 months respectively. In severity terms: average overshooting post-revision in previous downward episode (June 2003 - June 2006) was -46 bps and in this period (since March 2009) it is currently running at -146 bps or 317% of the previous episode.

Good luck to anyone believing that ECB policy (repo) rate is not going to head for 3.75-4.0%...