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Jackson Hole: Inflation, Phillips Curve, Income Inequality, Housing and The Taylor Rule

This is a syndicated repost courtesy of Snake Hole Lounge. To view original, click here. Reposted with permission.

Janet Yellen, “Super” Mario Draghi and other Central Bankers are meeting at the 2017 Economic Policy Symposium on “Fostering a Dynamic Global Economy” at Jackson Hole for the next three days.

Now The Balance Begins To Shift

The balance between QE and Treasury supply will begin to shift in July. The underlying bid it has provided for stocks and Treasuries will begin to fade.

This report tells why, and what to look for in the data and the markets.  GO TO THE POST

Topics will include the persistent low inflation in advanced economies, like the US 1.5% growth rate on Personal Consumption Expenditures Core Prices YoY despite the staggering fiscal and monetary stimulus thrown at it.

Since The Fed’s massive intervention of around $10 trillion, inflation (as measured by core prices of PCE YoY) only surprised The Fed’s 2% target rate once in early 2012. And wage/earnings growth is the worst after a recession in modern history for most of the population.

Yet expenses that many households are concerned about like home prices are not included in core PCE growth which is currently growing at 5.7% YoY. (Note that home prices YoY are on the left axis since they swamp inflation and wage growth on the right axis).

And I doubt that participants at Jackson Hole (not Snake Hole) will discuss the fact that income inequality has gotten progressively worse with declining interest rates and Fed intervention.

You will notice that while inflation (core PCE) is included in the Taylor Rule (Rudebusch specification), home price and rent growth are not included. If home price growth was included, The Fed would be raising rates rather than putting rate hikes on hold.

As it is, The Fed Funds Target Rate is 460 basis points below where it should be according to the Taylor Rule.

Then we have the Phillips Curve, the relationship between inflation and unemployment. In theory, low unemployment should lead to increasing wage growth (therefore, inflation). But such is not the case during “the recovery.”

An alternative view of the Phillips Curve since The Fed’s massive intervention shows declining unemployment to near full-employment while inflation is stalled at 1.50% YoY.

Prediction: Yellen and Draghi will say everything is beautiful. But if everything is beautiful, why are global Central Bank rates still near zero?

Here is Janet Yellen at Jackson Hole hunting rate hawks who insist on further rate hikes.



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