Edward Conard

Top Ten New York Times Bestselling Author

  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
  • “Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Wednesday, July 17, 2024

AI Summary. Retail grocery workers' wages rose roughly 15 percentage points more than wages in food manufacturing and the overall workforce, and profit margins at food and beverage stores increased from 2.9% to 4.4% while food manufacturing margins were little changed at about 6.8%. That margin increase is small relative to the 25% rise in grocery prices.

Thomas Klitgaard Federal Reserve Bank of New York
Date Posted:

Grocery prices have outpaced inflation due to commodity prices and above-average wage growth for low-paid retail grocery workers. Profit margins have remained steady for food manufacturers and increased by 1.5pp for retailers. @NewYorkFed

Do rising retail wages, not profit margins, explain higher grocery prices?

Core argument: Food and beverage retail store profit margins rose from 2.9% in 2019 to 4.4% in 2023, an increase small relative to the 25% rise in grocery prices over the same period.

The increase in retail grocery workers’ wages since 2019 has been roughly 15pp greater than that of wages for the food manufacturing sector and the workforce as a whole. Commodity goods, energy, other inputs in 2023 were up 15% relative to what they were in 2019, while costs for food and beverage retail stores increased 18%. Revenues rose 15% [for food manufacturers] and retail sales data recorded a 25% increase in revenue for food and beverage stores. Putting these results together yields a measure of the profit margin: the ratio of revenue minus operating costs to revenue. For food manufacturing, the margin was little changed, going from 6.9% in 2019 to 6.8% in 2023, while increasing from 2.9% to 4.4% for food and beverage retail stores. But put in context, this increase in grocery store profit margins (revenues over costs) is small compared to the 25% increase in grocery prices over this period.

Takeaways by Macro Roundup® AI

  1. Food and beverage retail store profit margins rose from 2.9% in 2019 to 4.4% in 2023, an increase small relative to the 25% rise in grocery prices over the same period.
  2. Food manufacturing margins were little changed, at 6.9% in 2019 versus 6.8% in 2023, with revenues up 15% against a 15% rise in commodity, energy, and other input costs.
  3. Retail grocery workers' wages have risen roughly 15 percentage points more since 2019 than wages in food manufacturing and in the workforce as a whole, while food and beverage retail store costs rose 18%.

Related Articles:

  • How Far $100 Goes at the Grocery Store After Five Years of Food Inflation — Prices for hundreds of grocery items have risen more than 50% over five years as food companies raised prices, with recent Labor Department data showing grocery prices up 1% from a year earlier. Executives have said higher prices were needed to offset their own rising costs for ingredients, transportation, and labor.
  • Price Discounts and Cheapflation During the Post-Pandemic Inflation Surge — Micro price data for food products at 91 large retailers across ten countries show that regular price changes, not temporary discounts, drove post-pandemic food inflation, as retailers raised the share of products with price increases from about half to over two-thirds. In the US, prices of cheaper products rose 30% versus 22% for premium varieties.
  • An Update About How Inflation Has Affected Households at Different Income Levels Since 2019 — The Congressional Budget Office estimates that income after transfers and taxes grew faster than consumption prices for all income groups, lowering the share of income needed to buy the same goods by 2% for the lowest-income fifth and 6.3% for the highest-income fifth.

AI Summary. Stochastic simulations in the Federal Reserve's own macroeconomic model, run with a policy rule allowing for political "capture" that makes the central bank less responsive to inflationary impulses, skew outcomes toward more inflation. Under high capture, median cumulative 6-year inflation was 0.6pp higher and the 95th-percentile outcome nearly 2pp higher, while low-inflation outcomes were equally likely.

Ernie Tedeschi and John Ricco The Budget Lab
Date Posted:

.@ernietedeschi and @riccoja argue that a Fed “captured” by political pressure would lead to median inflation 0.6% higher after six years.

Does a politically captured central bank skew outcomes toward higher inflation?

Core argument: In stochastic simulations of the Fed's FRB/US model, the median cumulative 6-year inflation outcome was 0.6pp higher under high political capture of the Fed (C = 0.85) than under no capture (C = 0).

A “captured” Fed would be one less responsive to inflationary impulses, which allows inflationary pressure to build unchecked. To test the implications of capture, we ran a monetary policy rule that allows for a spectrum of political “capture” through a series of stochastic simulations in FRB/US, the Fed’s macroeconomic model. In these simulations, FRB/US picks random historical economic shocks to key variables occurring between 1970 and 2023 and applies them to its forward forecast. We ran 1,000 such simulations each assuming C = 0 (no political capture) and alternatively C = 0.85 (high political capture). C = 1 implies extreme perfect capture, in which the Fed only responds asymmetrically to low inflation and high unemployment. Figure 2 illustrates the results. The x-axis shows cumulative 6-year inflation, while the y-axis denotes the probability of each outcome in our simulations. A captured Fed skews economic outcomes towards more inflation over time. In our simulations, low inflation was just as likely under our two capture assumptions. But the median inflationary outcome was +0.6pp higher after six years under high capture. And the outlier 95th percentile outcome was almost 2pp higher under high capture.

Takeaways by Macro Roundup® AI

  1. In stochastic simulations of the Fed's FRB/US model, the median cumulative 6-year inflation outcome was 0.6pp higher under high political capture of the Fed (C = 0.85) than under no capture (C = 0).
  2. In the FRB/US simulations, the 95th percentile inflation outcome was almost 2pp higher under high capture, while low-inflation outcomes were just as likely under both capture assumptions.
  3. The analysis ran 1,000 simulations for each capture assumption, with FRB/US drawing random historical shocks to key variables occurring between 1970 and 2023 and applying them to its forward forecast.

Related Articles:

  • Fiscal Dominance and the Return of Zero-Interest Bank Reserve Requirements — Fiscal dominance requires governments to fund deficits at the margin with non-interest-bearing debt, and the revenue from inflation taxation—both expected and unexpected—is limited. The authors argue a US fiscal dominance episode could end the payment of interest on bank reserves and restore requirements that banks hold large zero-interest reserves against deposits.
  • Changing Central Bank Pressures and Inflation — The authors argue that slowing globalization, fragmenting global flows, longer supply chains, and fiscal pressures from pandemic-era debt and population aging are pushing average long-run inflation upward. They contend that keeping inflation low and stable would require offsetting political-economy factors such as stronger central bank independence or more credible public debt policy.
  • Living with High Public Debt — High public debt ratios are likely to persist because large sustained primary budget surpluses are politically unrealistic, real interest rates are already very low, faster global growth is hard to engineer, inflation is not a sustainable route to reducing debt, and financial repression is less feasible amid liberalized markets.

AI Summary. Escalating trade tensions could raise near-term inflation risks by increasing the cost of imported goods along supply chains, and disappointing inflation data could destabilize the return to price stability if short-term expectations spike. Elevated inflation raises the prospect of higher-for-longer interest rates, increasing external, fiscal, and financial risks, including dollar appreciation that disrupts capital flows.

IMF Staff International Monetary Fund
Date Posted:

The IMF warns escalating trade tensions present new upside risks to inflation, “raising the prospect of higher-for-even-longer interest rates.”

Do rising trade tensions threaten the return to price stability?

Core argument: Risks to the global outlook remain balanced overall, though escalating trade tensions could raise near-term inflation risks by increasing the cost of imported goods along the supply chain.

Overall, risks to the outlook remain balanced but some near-term risks have gained prominence. The escalation of trade tensions could further raise near-term risks to inflation by increasing the cost of imported goods along the supply chain. Bumpiness along the remaining disinflation path could destabilize the return to price stability if short-term expectations spike upward as a result of disappointing inflation data. The risk of elevated inflation has raised the prospects of higher-for-even-longer interest rates, which in turn increases external, fiscal, and financial risks. Prolonged dollar appreciation arising from rate disparities could disrupt capital flows and impede planned monetary policy easing, which could adversely impact growth. Persistently high interest rates could raise borrowing costs further and affect financial stability if fiscal improvements do not offset higher real rates amid lower potential growth.

Takeaways by Macro Roundup® AI

  1. Risks to the global outlook remain balanced overall, though escalating trade tensions could raise near-term inflation risks by increasing the cost of imported goods along the supply chain.
  2. Bumpiness along the remaining disinflation path could destabilize the return to price stability if disappointing inflation data cause short-term inflation expectations to spike upward.
  3. Elevated inflation risk raises the prospect of higher-for-even-longer interest rates, with prolonged dollar appreciation from rate disparities potentially disrupting capital flows, impeding planned monetary easing, and raising borrowing costs and financial stability risks.

Related Articles:

  • The Big Picture: Back to the Future — The secular backdrop has shifted from disinflationary to more inflationary, with interest rates no longer near zero and real rates no longer negative. Household balance sheets are as healthy as they have been in 20 years, leaving room to borrow, while the public sector is as indebted as it has ever been.
  • Global Supply Chains and U.S. Import Price Inflation — An analysis of more than 25m trade flows among 52 exporters and 52 importers attributes most early growth in U.S. import prices to global factors common across countries, with U.S. demand factors taking over later. Foreign suppliers catching up with demand, notably China, account for the subsequent decline in import price inflation.
  • Can Trade Intervention Lead to Freer Trade? — China accounts for over 31% of global manufacturing but under 13% of global consumption, while the United States accounts for under 17% of manufacturing and nearly 27% of consumption. The author argues persistent surpluses reflect household subsidies to producers, and that the US could counter them with tariffs or taxes on capital inflows.

AI Summary. Yield-curve models estimated using only data available to investors in real time show no trend in term premiums, attributing the long-run decline in long-term Treasury yields instead to a fall in the expected long-run level of short-term interest rates. That decline is consistent with lower inflation and a lower neutral long-run real interest rate.

Michael Kiley Federal Reserve Board
Date Posted:
Is Database:
Database

Using information available to market participants in each period, Michael Kiley finds that the decline in 10-year Treasury rates since 1990 is attributed to a decline in the expected value of short-term interest rates, with no trend in the term premium.

Why have long-term Treasury yields declined over recent decades?

Core argument: Standard yield-curve decompositions using the entire history of data attribute much of the trend decline in long-term Treasury yields since 1992 to a large downward trend in term premiums through 2022.

A predominant set of tools used in discussions of the yield curve are models that decompose the yield curve into expected short-term interest rates and term premiums. Standard decompositions of the Treasury yield curve attribute much of the trend decline in long-term yields [since 1992] to term premiums. The standard decomposition is based on the entire history of data. These models show a large downward trend in term premiums from the early 1990s (or earlier) to 2022. In contrast to the typical implementation of the approach, the analysis herein only uses information available in real time. Using data only available in real time suggests no trend in term premiums. Rather, the trend decline is attributed to a decline in the long-run expected value of short-term interest rates. This real time approach arguably better captures the information available to investors buying and selling Treasury securities at a given point in time. Importantly, a trend decline in the expected short term interest rate is consistent with a decline in inflation and in the neutral long-run real interest rate.

Takeaways by Macro Roundup® AI

  1. Standard yield-curve decompositions using the entire history of data attribute much of the trend decline in long-term Treasury yields since 1992 to a large downward trend in term premiums through 2022.
  2. Restricting the decomposition to information available in real time suggests no trend in term premiums, attributing the decline in long-term Treasury yields instead to a fall in the long-run expected value of short-term interest rates.
  3. A trend decline in expected short-term interest rates is consistent with a decline in inflation and in the neutral long-run real interest rate, and the real-time approach arguably better captures the information available to Treasury investors at each point in time.

Related Articles:

  • The Transition to a Higher Cost of Capital — Bond yields near 4.5% sit below the 5.5% short-term interest rate, leaving little risk premium, and those yields have been enough to draw buyers back toward normal bond holdings. The author argues yields still need to rise to a sustainable cost of capital given structurally higher fiscal and inflationary spending.
  • Markets Think Inflation Will Be Too High For The Next 20 Years — Inflation expectations derived from the gap between regular Treasury yields and inflation-indexed Treasury yields show expected annual inflation over the next 10 and 20 years running considerably above expected inflation for the decade beginning 20 years out. Before the pandemic-era inflation surge, actual inflation and expected future inflation tracked each other closely.
  • Quo Vadis, r*? The Natural Rate Of Interest After The Pandemic — Estimates of the natural rate of interest across core advanced economies suggest it may have increased, though the estimates are widely dispersed and statistically uncertain. Low expected potential growth and rising longevity may weigh on the natural rate, while large fiscal deficits, age-related spending, and public investment needs for infrastructure, defense, and the green transition may push it up.

AI Summary. German net public investment has been close to zero since the start of the century, leaving the ratio of public capital to economic output consistently falling. The author argues Germany should use its large private-sector surplus savings at home and repeal the constitutional "debt brake" to fund needed public investment.

Martin Wolf Financial Times
Date Posted:

.@MartinWolf_ notes that Germany’s public investment of 2.5% of GDP is “extraordinarily low” relative to its peers, and argues for increased public investment funded by a portion of net private sector savings, which were 7.5% of GDP in 2023.

Should Germany scrap its debt brake to fund public investment?

Core argument: German net public investment has been close to zero since the beginning of this century, and the ratio of public capital to GDP has consistently fallen.

German net public investment has been close to zero since the beginning of this century. Thus, the ratio of public capital to GDP has been consistently falling. It makes no sense for a country with such vast surplus savings in its private sector not to use them at home, thereby generating both a stronger supply side and the demand that Germany and the Eurozone will need. Germany’s short-term problems will pass. Its longer-term ones are more challenging. But the most unnecessary one is its reluctance to fund needed public investment at home. The time to repeal the absurd “debt brake” in the constitution is now.

Takeaways by Macro Roundup® AI

  1. German net public investment has been close to zero since the beginning of this century, and the ratio of public capital to GDP has consistently fallen.
  2. Germany's vast private-sector surplus savings should be used at home, generating both a stronger supply side and the demand that Germany and the Eurozone will need.
  3. Germany's short-term problems will pass while its longer-term ones are more challenging, and its most unnecessary problem is a reluctance to fund needed public investment at home, which argues for repealing the constitutional "debt brake.".

Related Articles:

  • Germany’s Record Trade Surplus — Germany's trade surplus has returned to 8% of GDP, with the authors attributing the gain to higher traded-goods prices boosting nominal exports despite weak export volumes. A growing share of the surplus is bilateral with the rest of the Eurozone, Central Europe, and the US.
  • Germany Is Losing Its Mojo. Finding It Again Won’t Be Easy — The International Monetary Fund projects Germany will be the only major economy to contract this year, while even sanctioned Russia grows. German exports long depended on a rapidly industrializing China buying its capital goods, but Chinese growth and import demand have faltered, and German industry still faces higher energy costs than U.S. and Asian competitors.
  • Which Country Should Design U.S. Industrial Policy? — Manufacturing is 15% of global GDP but 11% of U.S. GDP versus 19% in Germany, 21% in South Korea, 26% in mainland China, and 34% in Taiwan, according to World Bank data. The author argues this gap stems from trade and industrial policies in surplus economies that effectively force households to subsidize manufacturing, drawing global manufacturers toward the largest subsidies.

AI Summary. The nominal value of the S&P 500 index of large American companies has risen almost 80% since the start of 2020, more than twice the percentage increase in US GDP, leaving its cyclically adjusted price-earnings ratio at 36. American share prices would need to fall by more than 50% for that ratio to return to its long-run average.

Economist Staff The Economist
Date Posted:

At current interest rates, US equity values would need to fall by around 1/3 for the gap between the Cyclically Adjusted Earnings Price Ratio and real Treasury yields to revert to the mean.

How far are stock valuations above their long-run average?

Core argument: The S&P 500's nominal market value has risen almost 80% since the start of 2020, more than twice the percentage increase in American GDP.

Since the beginning of 2020, before the crash that accompanied the spread of covid-19, the nominal market value of America’s S&P 500 index has risen by almost 80%, more than twice as much in percentage terms as the increase in American GDP. The index’s cyclically adjusted price-earnings (CAPE) ratio is 36. It has only been higher near the worst of the dotcom bubble and in 2021, both of which preceded crashes. It also means that the “CAPEyield”, the cape’s inverse and a predictor of real returns, is close to a historic low, providing an impetus to sell stocks. Indeed, the CAPE yield only just beats the guaranteed real yield on inflation-protected Treasury bonds. At current interest rates, American share prices would need to fall by around 1/3 for the gap between the CAPE and real Treasury yields to revert to the mean. For the CAPE to return to its long-run average, they would have to crater by more than 50%.

Takeaways by Macro Roundup® AI

  1. The S&P 500's nominal market value has risen almost 80% since the start of 2020, more than twice the percentage increase in American GDP.
  2. The S&P 500's cyclically adjusted price-earnings ratio stands at 36, a level exceeded only near the worst of the dotcom bubble and in 2021, both of which preceded crashes.
  3. At current interest rates, American share prices would need to fall by around a third for the gap between the CAPE yield and real Treasury yields to revert to the mean, and by more than 50% for the CAPE to return to its long-run average.

Related Articles:

  • S&P 500 Looking More Vulnerable — The 10 largest companies in the S&P 500 account for 35% of its market value but only 23% of its earnings, the widest such gap on record. The author argues this reflects record bullishness on future earnings from a small group of companies, compounding the index's concentration.
  • The Life Cycle of Market Champions — The 10 largest US companies make up almost one-third of US equity market capitalization, a concentration not seen in decades. Historically, about half of each decade's largest companies underperform the market and drop out of the top 15 within a decade or two, and nearly all are eventually displaced.
  • Stock Market Concentration — Over 2014–2023 the 10 largest U.S. stocks averaged 19% of market capitalization while generating 47% of total economic profit, and by 2023 they were 27% of market capitalization and 69% of economic profit. The S&P 500 returned above its average when concentration was rising and below it when concentration was falling.

AI Summary. Republicans won the most congressional votes by substantial margins in swing states including Arizona, Georgia, Nevada, North Carolina, Pennsylvania, and Wisconsin, with Michigan the only true swing state where they failed to win a vote majority. The author argues this undercuts claims the election was a broad repudiation of Donald Trump.

Sean Trende American Enterprise Institute
Date Posted:
Is Database:
Database

.@SeanTrende @AEI notes that Republicans won 51.4% of 2022 two-party Congressional votes, and forecasts, “If Republicans match that showing in 2024, Trump will almost certainly return to the White House, with full control of the House and Senate.”

Did swing-state results show a broad repudiation of Republicans?

Core argument: Republicans won the most congressional votes by substantial margins in the swing states of Arizona, Georgia, Nevada, North Carolina, Pennsylvania, and Wisconsin, with Michigan the only true swing state where they failed to win a vote majority.

While 2022 was undoubtedly a good year for Democrats, analysts today lean too heavily on the results when looking to 2024. Republicans received the most votes for Congress by substantial margins in swing states like AZ, GA, NV, NC, PA, and WI. The only true swing state in which Republicans failed to win a majority of the vote was MI. Republicans also had a pretty good year in state legislatures. Though not as strong as 2010 or 2014, Republicans still received a majority of the vote. In fact, their margin was roughly the same as it was in congressional elections. The idea that the 2022 election represented a massive repudiation of Donald Trump is not supported by the result. If Republicans match that showing in 2024, Trump will almost certainly return to the White House, with full control of the House and Senate.

Takeaways by Macro Roundup® AI

  1. Republicans won the most congressional votes by substantial margins in the swing states of Arizona, Georgia, Nevada, North Carolina, Pennsylvania, and Wisconsin, with Michigan the only true swing state where they failed to win a vote majority.
  2. Republicans received a majority of the vote in state legislative elections by roughly the same margin as in congressional races, though weaker than their showings in 2010 or 2014.
  3. The 2022 results do not support the claim of a massive repudiation of Donald Trump, and a repeat of that Republican showing in 2024 would almost certainly return Trump to the White House with full control of the House and Senate.

Related Articles:

  • An Unsettled Electorate: How Uncertainty and Apathy Are Shaping the 2024 Election — A survey of young registered voters finds 54% backing Biden and 46% backing Trump, with 60% of young women supporting Biden while 52% of young men support Trump. Young men are more likely than young women to say the country has gone too far in giving women equal rights, 19% versus 9%.
  • The Road to A Political Realignment in American Politics — College-educated voters are now more likely to identify as Democrats while those without degrees back Republicans, with educational attainment increasingly correlated with views on abortion, LGBTQ+ rights, and religion's relationship to government. This sorting leaves most states politically uncompetitive, with eight states near the national average in education levels holding 97 electoral votes in play.
  • Progressives Beware: High Turnout Now Favours The Right — In US elections from the 1960s to 2000, higher turnout tended to favor Democrats because habitual voters were disproportionately wealthy and well-educated, while occasional voters came from lower socio-economic groups. That gradient has reversed as economically marginalised voters shifted rightward: lower-turnout, graduate-heavy electorates now tend to help Democrats.

Thursday, July 18, 2024

AI Summary. The authors classify U.S. disinflation episodes by how committed monetary policymakers were, judging commitment strong in some episodes and weak in others based on policy records and public statements about acceptable output losses. They find no evidence that stronger commitment affected expected inflation, and conclude weak commitment failed mainly through premature abandonment of disinflationary policy.

Christina Romer and David Romer National Bureau of Economic Research
Date Posted:

Over 9 post-WWII episodes in which the Fed embarked on disinflation, tightening with high initial commitment and willingness to endure output losses yielded a 5-year reduction of 3pp, while very weak commitment resulted in ½ pp after 5 years.

Does policymakers' commitment to disinflation work by shaping expectations or by persistence?

Core argument: Classifying policymakers' statements in policy records, speeches, and testimony, the authors judge monetary policymakers strongly committed to disinflation in 1958, 1979, and 1981, and only weakly committed in 1968, 1974, and 1978.

We categorize this variation in commitment using what policymakers said about several issues both in the policy records and in public speeches and testimony,[including]how much output loss policymakers were willing to accept. We conclude that monetary policymakers were very committed to disinflation in the 1958, 1979, and 1981 episodes and only weakly committed in the 1968, 1974, and 1978 episodes. In 1981, e.g. policymakers felt they had erred in backing away from disinflationary policy in the spring of 1980, and were willing to accept large output losses to finally get inflation down. In 1978, they wanted no more than a mild slowing of output growth, and believed that monetary policy could not reduce inflation on its own. There is no evidence that stronger commitment to disinflation directly affected expected inflation. The main channel through which weak commitment led to [failure] was premature abandonment of the disinflationary policy.

Takeaways by Macro Roundup® AI

  1. Classifying policymakers' statements in policy records, speeches, and testimony, the authors judge monetary policymakers strongly committed to disinflation in 1958, 1979, and 1981, and only weakly committed in 1968, 1974, and 1978.
  2. The authors conclude that weak commitment led to failed disinflation mainly through premature abandonment of the disinflationary policy, and find no evidence that stronger commitment affected expected inflation.
  3. In 1981 policymakers, judging they had erred in backing away from disinflation in the spring of 1980, were willing to accept large output losses, whereas in 1978 they sought no more than a mild slowing of output growth and believed monetary policy alone could not reduce inflation.

Related Articles:

  • The Fed Can Take Its Time Taming Inflation — Wage growth and price growth reinforce each other and both run 1 to 1.5 percentage points above pre-pandemic rates, with underlying inflation estimated at 2.5% to 3%. The author puts roughly a 1-in-3 chance that persistently strong demand keeps inflation above 3%, and argues strong job growth lets the Federal Reserve spend months assessing that risk.
  • How Quickly Do Prices Respond to Monetary Policy? — An analysis finds recent swings in inflation have been concentrated in the categories most sensitive to monetary policy, with inflation for that responsive group now close to its pre-2020 rate. The authors estimate that interest rate increases likely began putting downward pressure on prices about a year later and will continue to do so near term.
  • Are Consumers Retrenching? — US labor income net of social insurance taxes has grown at a 6% annual rate while nominal consumer spending grew 4% and capital income 3%. Growth in core "market-based" consumer spending is running about half a percentage point below its 4.4% pre-pandemic annual average, while net labor income runs roughly a point faster.

AI Summary. Markets are again over-pricing Federal Reserve rate cuts: rising CEO confidence, 3.0% consumer price inflation, and record stock prices argue against cutting, meaning the case for cuts rests on the Federal Reserve's model of a lower long-run neutral rate rather than incoming data.

Torsten Sløk Apollo
Date Posted:

Torsten Sløk argues that reflexivity, financial conditions easing in advance of foreshadowed rate cuts, is making it more difficult to cut. “The Fed’s insistence on the next move being a cut makes it more difficult to actually cut rates.”

Are markets over-pricing rate cuts that incoming data do not support?

Core argument: CPI inflation at 3.0% does not argue for the Fed to cut interest rates soon, particularly with the stock market reaching new all-time highs and CEOs becoming increasingly optimistic about the outlook.

The market is making the same mistake it made in January when it priced in six cuts. Looking at the ongoing uptrend in CEO confidence, there is no reason for the Fed to cut interest rates anytime soon. In fact, it is not the incoming data that is the reason to begin cutting interest rates soon. It is the Fed’s model, which says that interest rates in the long run should be much lower than the fed funds rate today. In other words, the Fed has moved from being data dependent to being r-star dependent. Not even CPI inflation at 3.0% argues for the Fed to cut interest rates soon, particularly not in a situation where the stock market is reaching new all-time highs every day, and CEOs are becoming increasingly optimistic about the outlook. The Fed’s insistence on the next move being a cut makes it more difficult to actually cut rates. That is because signals to the market about coming Fed cuts push stock prices higher and tighten credit spreads, which in turn puts more upward pressure on growth and inflation.

Takeaways by Macro Roundup® AI

  1. CPI inflation at 3.0% does not argue for the Fed to cut interest rates soon, particularly with the stock market reaching new all-time highs and CEOs becoming increasingly optimistic about the outlook.
  2. The Fed has shifted from data dependence to r-star dependence, with the case for cuts resting on its model that long-run interest rates should be much lower than today's fed funds rate rather than on incoming data.
  3. The Fed's insistence that its next move is a cut makes cutting harder, because signals of coming cuts push stock prices higher and tighten credit spreads, adding upward pressure on growth and inflation.

Related Articles:

  • The Fed Cut Reflexivity Paradox — Financial conditions are significantly easier than when the Federal Reserve began raising interest rates, with the S&P 500's market value up $9tn since the Fed shifted to discussing cuts — a household windfall equal to about 50% of annual consumer spending. Easy financial conditions and continued fiscal support are offsetting rate hikes.
  • The Transition to a Higher Cost of Capital — Bond yields near 4.5% sit below the 5.5% short-term interest rate, leaving little risk premium, and those yields have been enough to draw buyers back toward normal bond holdings. The author argues yields still need to rise to a sustainable cost of capital given structurally higher fiscal and inflationary spending.
  • Markets Think Inflation Will Be Too High For The Next 20 Years — Inflation expectations derived from the gap between regular Treasury yields and inflation-indexed Treasury yields show expected annual inflation over the next 10 and 20 years running considerably above expected inflation for the decade beginning 20 years out. Before the pandemic-era inflation surge, actual inflation and expected future inflation tracked each other closely.

AI Summary. Labor demand continues to outpace labor supply, with job openings 17% above pre-pandemic levels and average wages up 3.9% year on year. The author argues current conditions do not warrant interest rate cuts, as the risk of inflation getting stuck above 2.5% is too great.

Michael Strain Project Syndicate
Date Posted:

.@MichaelRStrain argues current economic conditions are still too strong to start a cutting cycle. “The risk that inflation gets stuck above 2.5% is too great for policymakers to lower rates now.” @AEIecon

Do labor market conditions justify cutting interest rates now?

Core argument: Job openings remain 17% above pre-pandemic levels, and by the author's calculations labor demand continues to outpace labor supply even as the labor market weakens from a still-strong position.

The labor market is weakening, but it is still strong. According to my calculations, labor demand continues to outpace labor supply. Job openings are normalizing, but they remain 17% higher than before the pandemic. This is reflected in wage inflation. Average wages grew by 3.9% in June year on year. Current economic conditions do not indicate that the Fed should begin cutting rates in the next two months. The risk that inflation gets stuck above 2.5% is too great for policymakers to lower rates now. The Fed has entered the last mile of its fight against inflation. With its credibility at stake, it must not flinch before it reaches the finish line.

Takeaways by Macro Roundup® AI

  1. Job openings remain 17% above pre-pandemic levels, and by the author's calculations labor demand continues to outpace labor supply even as the labor market weakens from a still-strong position.
  2. Average wages grew 3.9% year on year in June, which the author presents as wage inflation arguing against a Fed rate cut in the next two months.
  3. The author argues the risk that inflation gets stuck above 2.5% is too great to lower rates now, with the Fed in the last mile of its inflation fight and its credibility at stake.

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  • The Fed Cut Reflexivity Paradox — Financial conditions are significantly easier than when the Federal Reserve began raising interest rates, with the S&P 500's market value up $9tn since the Fed shifted to discussing cuts — a household windfall equal to about 50% of annual consumer spending. Easy financial conditions and continued fiscal support are offsetting rate hikes.
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AI Summary. Effective homeowners' insurance rates rose 34% nationally between 2018 and 2023, with increases of 43% in Florida and 60% in Texas, and premiums equal to 5% of per capita disposable income in Louisiana, the highest in the US. Loss exposure of Florida's two state insurance backstops is estimated at 1% of the state's economic output.

Sujeet Indap Financial Times
Date Posted:

Between 2018 and 2023 the price of homeowners insurance in the US increased 34%, vs 21% for headline CPI. Florida and Texas saw 43% and 60% rises respectively.

How unevenly are rising homeowners' insurance costs hitting US states?

Core argument: Effective homeowners' insurance rates rose 34% across the US between 2018 and 2023, with Texas up 60% and Florida up 43%, according to data compiled by S&P.

Overall effective rate changes in the US were 34% between 2018 and 2023. But in Florida and Texas, the growth has been 43% and 60%, respectively, according to data complied by S&P. In Louisiana, homeowners’ insurance premiums accounted for 5% of per capita disposable income, according to data compiled by Moody’s, the largest hit in America. Texas has insurers of last resort called the Texas Windstorm Insurance Association as well as the Texas Fair Plan. Florida’s state backstop plans are called the Citizens Property Insurance Corporation and the Florida Hurricane Catastrophe Fund. Moody’s estimates that the loss exposure of these two now accounts for 1% of the Sunshine State’s total economic output. The state of Florida does not explicitly guarantee these entities but rating agencies think Florida will stand behind them and they are therefore counted as contingent liabilities.

Takeaways by Macro Roundup® AI

  1. Effective homeowners' insurance rates rose 34% across the US between 2018 and 2023, with Texas up 60% and Florida up 43%, according to data compiled by S&P.
  2. Louisiana homeowners' insurance premiums accounted for 5% of per capita disposable income, the largest such burden in America, according to data compiled by Moody's.
  3. Moody's estimates the loss exposure of Florida's Citizens Property Insurance Corporation and Florida Hurricane Catastrophe Fund equals 1% of state economic output, counted by rating agencies as contingent liabilities despite no explicit state guarantee.

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AI Summary. In mice, the pro-inflammatory protein IL-11 increases with age across cell types and tissues, and treating older mice with an IL-11-blocking antibody improved metabolism and muscle function and reduced frailty and ageing biomarkers. The authors report the treatment extended median lifespan by 22.5% in males and 25% in females.

Anissa Widjaja, Wei-Wen Lim, et al. Nature
Date Posted:

A treatment that inhibits the pro-inflammatory cytokine IL-11 extends the median lifespan of male mice by 22.5% and of female mice by 25%, and may inhibit aging pathologies in older people.

Can blocking a pro-inflammatory protein extend lifespan in mice?

Core argument: Anti-IL-11 treatment begun at 75 weeks of age and continued until death extended median lifespan by 22.5% in male mice and 25% in female mice.

​​For healthspan and lifespan, inflammation is a centrally important hallmark. Here we examined whether IL-11, a pro-inflammatory cytokine, has a negative effect on age-associated disease and lifespan. As mice age, IL-11 is upregulated across cell types and tissues to modulate cellular, tissue- and organismal-level ageing pathologies. Administration of anti-IL-11 to 75-week-old mice for 25 weeks improves metabolism and muscle function, and reduces ageing biomarkers and frailty across sexes. Treatment with anti-IL-11 from 75 weeks of age until death extends the median lifespan of male mice by 22.5% and of female mice by 25%. We suggest that anti-IL-11 therapy, which is currently in early-stage clinical trials for fibrotic lung disease, may provide a translational opportunity to determine the effects of IL-11 inhibition on ageing pathologies in older people.

Takeaways by Macro Roundup® AI

  1. Anti-IL-11 treatment begun at 75 weeks of age and continued until death extended median lifespan by 22.5% in male mice and 25% in female mice.
  2. Administering anti-IL-11 to 75-week-old mice for 25 weeks improved metabolism and muscle function and reduced ageing biomarkers and frailty in both sexes.
  3. IL-11, a pro-inflammatory cytokine, is upregulated across cell types and tissues as mice age, and anti-IL-11 therapy, already in early-stage clinical trials for fibrotic lung disease, may offer a translational opportunity for ageing pathologies in older people.

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